January 17, 2022

Daily Market Commentary

Canadian Headlines

• The Canadian dollar is strengthening along with other commodity-driven currencies, even as trading is expected to stay subdued during a public holiday in the U.S. Crude prices, already up more than 10% this year, could rise even further because of tight supplies, according to Vitol, the world’s biggest independent oil trader

World Headlines

• European stocks rose as investors looked ahead to the upcoming earnings season for clues on whether companies can sustain profit growth despite rising risks. The Stoxx Europe 600 index added 0.5% by 10:51 a.m. in London, with media and technology among the best-performing sectors. GlaxoSmithKline Plc, meanwhile, jumped to the highest since May 2020 as Unilever Plc weighs making a higher offer for its consumer unit. Unilever slumped more than 7%. European equities are rebounding from last week’s declines spurred by concerns over more hawkish Federal Reserve policy, which has particularly weighed on higher-valued areas of the market like technology.
• Stocks were mixed Monday as traders weighed a global advance in sovereign bond yields and corporate developments. U.S. stock and bond markets are shut Monday for a holiday. Bond yields rose around the world after U.S. Treasuries tumbled Friday on concerns about more hawkish Federal Reserve policy to fight inflation. JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon said Friday the central bank could raise rates as many as seven times and traders are reconsidering an earlier kickoff for the first European Central Bank rate increase in more than a decade.
• Chinese shares climb after PBOC cuts rates and fourth-quarter growth beat offsets disappointing retail sales. China bond futures erase early spike higher to trade near flat. Hong Kong stocks fall 0.7% while Kospi index drops as much as 1.5% following another North Korea missile test. The dollar is narrowly mixed against G-10 peers, with yen leading the losers while euro and loonie strengthen.
• Brent oil traded near the highest intraday level since 2014 as the market tightened and concerns about the impact of omicron eased. Futures in London held at about $86 a barrel after a fourth weekly advance on Friday as winter temperatures supported demand for heating fuels. Meanwhile, geopolitical jitters returned as Yemen’s Houthi fighters claimed to have launched drone strikes on the United Arab Emirates that caused an explosion and fire on the outskirts of the capital Abu Dhabi leaving three people dead. Oil’s market structure has firmed in a bullish backwardation pattern, indicating growing supply tightness. High prices are justified and futures could rise even further, according to trader Vitol Group, though gains were tempered on Monday by signs of slowing Chinese economic growth.
• Gold edged higher after its best week in two months as traders weigh the outlook for monetary policy against the threat posed by a fresh coronavirus wave in the U.S. Facing pressure from Congress and the public to tackle the hottest inflation since the 1980s, a chorus of Federal Reserve officials this month floatedraising rates in March and the potential need to hike as many as five times this year, marking a clear shift in projections from just a few weeks ago. The central bank meets next Tuesday to decide on policy. While more central banks globally are seeking to normalize monetary policy to contain price pressures, China on Monday lowered a key interest rate for the first time since the peak of the pandemic in 2020. That came as a property-market slump and repeated virus outbreaks damped the nation’s growth outlook.
• China’s central bank cut its key interest rate for the first time in almost two years to help bolster an economy that’s lost momentum because of a property slump and repeated virus outbreaks. In a stark policy divergence with other major economies, the People’s Bank of China lowered the rate at which it provides one-year loans to banks by 10 basis points — the first reduction since April 2020. While inflation is the dominant concern for central bankers in the U.S. and Europe, China’s relatively stable prices mean policy makers have shifted to boosting growth. Official data Monday showed gross domestic product rose 4% last quarter from a year earlier, the weakest since early 2020.
• German drugmaker Cheplapharm Arzneimittel GmbH seeks to raise about 750 million euros ($855 million) in an initial public offering to reduce debt and finance future acquisitions. The listing on the Frankfurt stock exchange should take place in the first quarter, the Greifswald-based company said Monday. Shareholder Braun Beteiligungs GmbH may also sell shares in the IPO. Bloomberg reported last year that Cheplapharm was speaking with advisers about a potential listing. A share sale could value the business at about 7 billion euros to 8 billion euros or more, people familiar with the matter told Bloomberg at the time.
• The controlling shareholders of Braskem SA are seeking to raise about $1.5 billion by selling shares in the petrochemical firm in what is expected to be one of Brazil’s largest equity offerings this year.  State-owned oil producer Petroleo Brasileiro SA and Novonor, the industrial conglomerate previously known as Odebrecht, filed for a secondary offering to sell as many as 154,886,547 preferred Braskem shares. They can raise a combined 8.1 billion reais ($1.5 billion) based on the stock’s close on Friday. The price per share will be set on Jan. 27, according to the prospectus. Braskem said that Morgan Stanley, JPMorgan Chase & Co., Banco Bradesco BBI, Banco Itau BBA, Citigroup Inc., UBS BB Investment Bank, Banco BTG Pactual SA and Banco Santander Brasil SA are handling the transaction. If the offering is fully sold, Petrobras and Novonor will virtually scrap all of their Braskem’s preferred stock, keeping just common shares.
• Unilever Plc plans to sharpen its focus on health and hygiene and sell off slow-growth brands as it weighs making a higher offer for GlaxoSmithKline Plc’s consumer unit. The Dove soap owner said Monday it will announce a revamp of its structure later this month. The company will refocus around its health, beauty and hygiene operations, suggesting divestitures may involve its food operations, which include the Ben & Jerry’s and Magnum ice cream brands. The strategy shift comes after Glaxo said over the weekend that it rejected three offers from the consumer-products company for a bundle of brands including Advil painkiller and Sensodyne toothpaste, the latest of which was worth 50 billion pounds ($68 billion).
• Bain Capital is in advanced talks to buy outsourcing firm VXI Global Solutions from Carlyle Group Inc., people familiar with the matter said, five years after selling its stake in the business to its private equity rival. Boston-based Bain is in the final stages of conducting due diligence on VXI and firming up details of a potential deal, the people said, asking not to be identified because the information is private. Bain has emerged as the likeliest buyer for the business after outbidding other buyout firms and industry players, the people said. The company, which could be valued at $1.5 billion to $2 billion in a sale, had drawn interest from buyout firms including Bain Capital and Baring Private Equity Asia, Bloomberg News reported last month.
• Boris Johnson faces another bruising week, with his future as U.K. prime minister in the balance amid a furious public backlash over rule-breaking parties at his Downing Street office. Six lawmakers in the governing Conservative Party have already called on Johnson to resign over allegations of alcohol-fueled get-togethers involving Downing Street staff when the country was in lockdown. Many Conservative members of Parliament report receiving hundreds of emails from local activists and voters angered by the alleged events, which include ones held in April 2021, the evening before Queen Elizabeth II sat alone at the funeral of her husband Prince Philip.
• More than 6 million households in England will struggle to pay their energy bills starting in April because of a 50% jump in prices due to be announced next month, according to the Resolution Foundation. That number is triple the current level of so-called fuel stress, where consumers spend at least 10% of their budgets on electricity and natural gas, researcher said Monday. When the full force of the cost increase takes effect, about 27% of households will fall into that category, up from 9% now. The analysis piles pressure on Prime Minister Boris Johnson’s government to ease a looming cost-of-living crisis. In addition to fuel bills, taxes and inflation are also rising, and economists expect mortgage rates will increase in the coming months.
• Iran-backed Yemeni fighters said they launched drone strikes on the United Arab Emirates that caused explosions and a fire on the outskirts of the capital Abu Dhabi leaving three people dead, ratcheting up tensions in the critical oil-exporting region. One of the biggest attacks to date on UAE soil ignited a fire at Abu Dhabi’s main international airport and set fuel tanker tanks ablaze in a nearby industrial area. Initial information suggested there was little or no impact on departing or arriving flights, according to a search of the tracking website FlightRadar24.
• Bankers are readying a mammoth debt package in case private equity firms bid for GlaxoSmithKline Plc’s consumer healthcare business after Unilever Plc’s $68 billion offer was rejected. The banks are modeling financings of 20 billion to 25 billion pounds ($34.1 billion) in both high-yield bonds and leveraged loans, and are considering debt denominated in sterling, dollars and euros, according to people familiar with the matter who requested anonymity due to the private nature of the discussions. If the debt package comes to pass, it would be one of the world’s biggest leveraged buyout deals. Banks are also considering how to raise even more cash if needed, using a combination of cross-over or even investment grade financing alongside subordinated debt, they said. At the current range, the package would be about seven times EBITDA, they said. A spokesperson for Glaxo declined to comment on the debt financing plans.
• Life may soon return to normal after two years of pandemic disruption, Pfizer Inc.’s chief executive officer said in an interview with Le Figaro.  “We will soon be able to resume a normal life,” Albert Bourla told the French paper. “We are well positioned to get there in the spring thanks to all the tools at our disposal: tests, very effective vaccines and the first treatments that can be taken at home.”  Pfizer manufactures two of those three tools. Besides making the top-selling vaccine in collaboration with Germany’s BioNTech SE, the U.S. drugmaker is introducing an antiviral pill called Paxlovid that has been shown to sharply reduce hospitalizations and deaths from Covid-19 in clinical trials.
• Russian President Vladimir Putin has said he wants NATO to reduce its presence in Eastern European countries that were once part of the Soviet bloc but his actions are achieving the opposite, said NATO’s chief. If Russia attacks Ukraine, as it is threatening with a deployment of almost 100,000 troops, the North Atlantic Treaty Organization will further expand its presence near Russia, Secretary-General Jens Stoltenberg said in an interview. He said the alliance is assessing how it could do so. To Western diplomats, the divergence between Mr. Putin’s demands that NATO retrench and Russia’s actions, prompting the alliance to reinforce its front lines, has deepened doubts about Moscow’s sincerity in recent talks. Russia has demanded that NATO commit never to include Ukraine or other new members, pull back forces from its east and roll back to its smaller, post-Cold War size.
• In the wake of Novak Djokovic’s departure from Melbourne on a wave of controversy and drama, the city is hoping the world’s attention will refocus on what he actually came for: the first grand slam of 2022. The uproar surrounding the tennis star was a major distraction from the build up to the Australian Open that began Monday, including the potential comeback of Andy Murray or the chance world womens’ no. 1 Ash Barty will be the first local to win her home tournament in 44 years. For host city Melbourne, the event should be a welcome boost to morale and businesses as Covid restrictions continue and cases keep rising.
• The Taliban is seeking China’s assistance in getting its Islamic Emirate government officially recognized by the international community, a crucial step that could help Afghanistan access some $9 billion in frozen reserves held overseas.  “All of the conditions of the international community required for recognition are already fulfilled,” Bilal Karimi, a deputy spokesman of the Taliban, said by phone on Monday. “The Islamic Emirate wants China to take the lead to help the current government achieve international recognition.” The U.S., its allies and even Russia and China have yet to recognize the Taliban government due to concerns over continued links with terrorism as well as human rights abuses and banning girls’ education. Some of the Taliban’s cabinet members are blacklisted under U.S. and UN sanctions.

*All sources from Bloomberg unless otherwise specified