January 18, 2022

Daily Market Commentary

Canadian Headlines

• Energy and financial stocks propelled Canadian stocks to their highest closing level since Nov. 25, as the benchmark index climbed for a second straight day. The S&P/TSX Composite Index jumped 0.8% Monday, or 179.89 points to 21,537.45 in Toronto. Oil and gas stocks were the best performers thanks to a rise in the price of West Texas Intermediate crude to $84.30 per barrel, while Brent traded near its highest level 2014. Toronto-Dominion Bank contributed the most to the index gain, increasing 1.7%. Jamieson Wellness Inc. had the largest percentage increase, rising 4%.
• Canadian banks are bringing forward their forecasts for interest rate hikes to as early as next week, amid growing evidence the economy is hitting limits and inflation pressures are rising. Economists at TD Securities and Laurentian Bank said Monday the Bank of Canada will start a hiking cycle at its policy decision on Jan. 26. Bank of Montreal brought forward its call on the first increase to March from April, while Bank of Nova Scotia said the central bank “cannot afford” to wait any longer.  The more hawkish calls follow the release of the Bank of Canada’s quarterly survey of business executives on Monday, which painted a picture of an economy running increasingly hot, with widespread labor shortages, record inflation expectations, and strong demand.
• Canada’s financial sector is facing a talent shortage in sustainable finance as demand for people who can evaluate ESG-related risks and opportunities far exceeds the supply, according to a new study. Environmental, social and governance factors are becoming central to investing and lending activities, but two-thirds of firms are impacted by the dearth of relevant skills, according to a Deloitte survey that was commissioned by Toronto Finance International and the Financial Centers for Sustainability. The study is another signal that talent shortages are hitting parts of the financial industry. Last week, the CEO of Royal Bank of Canada said banks are struggling to hire enough engineers, data scientists and artificial intelligence specialists because of competition from other sectors. U.S. banks from JPMorgan Chase & Co. to Citigroup Inc. have indicated in recent days they’re paying more — sometimes a lot more — to hire and retain the people they need.

World Headlines

• European stocks declined as rising Treasury yields weighed on frothier parts of the market as investors brace for tighter monetary policy and the earnings season. The Stoxx Europe 600 Index dropped 1.1% by 11:54 a.m. in London, falling earlier to the lowest level in a month, with technology shares leading the retreat as the slide in Nasdaq futures signaled more pain for the battered sector. Travel and leisure stocks also underperformed, while energy outperformed as Brent oil gained to the highest level in seven years. European equities have had a volatile start of the year as investors have shifted out of more expensive and rates-sensitive sectors such as technology and into cheaper, so-called value shares. Market participants are now waiting for the earnings season to gauge whether companies can continue delivering robust profits despite inflation and Covid-19 risks.
• Treasury yields surged, Nasdaq 100 Index future stumbled and global stocks were dragged down by concern that central banks will have to raise rates sooner than expected. Treasuries fell across the curve, pushing two-year and 10-year yields up to levels last seen before the pandemic roiled markets. U.S. stocks were poised to drop when the market reopens from a holiday, with Nasdaq contracts down about 2% and technology stocks down in premarket trading. Tech also led the retreat in Europe, while energy shares fluctuated and Saudi stocks rallied.
• Asian stocks gave back early-session gains to head for a fourth day of losses after a jump in Treasury yields raised concerns about potential for faster-than-expected interest-rate hikes by the Federal Reserve. The MSCI Asia Pacific Index fell 0.6% after having climbed by a similar level in early trading, setting the stage for the longest losing streak in a month. Technology and materials were among the worst-performing sectors. The broad regional selloff came as Brent oil prices surged to the highest levels in seven years, which added to worries about inflation. Riskier assets took a beating as the two-year U.S. Treasury yield jumped past 1% for the first time since 2020 and the 10-year yield climbed to 1.85%. Equity benchmarks in Vietnam and South Korea were the biggest losers in Asia. Japanese stocks also reversed early gains, with the country’s central bank standing pat on policy while adjusting its view of inflation risks for the first time since 2014.
• Brent oil surged to the highest level in seven years as robust demand and strained supplies make physical markets run hot in the world’s largest consuming region. Futures in London surged to $88.13 a barrel, the highest since October 2014. Traders are paying higher and higher premiums for cargoes in Asia, as fears fade over the demand impact from omicron, while supplies are tightened by a range of outages from Libya to North America. A drone attack on oil facilities in the UAE on Monday flared geopolitical risks. Goldman Sachs Group Inc. raised its Brent forecasts through 2022 and 2023 and predicted $100 oil in the third quarter. Robust fundamentals have reversed last year’s price slump, keeping the market in a surprisingly large deficit, it said.
• Gold declined as U.S. bond yields climbed to a two-year high amid increasing bets the Federal Reserve will raise interest rates in March. Yields on 10-year Treasuries hit the highest level since January 2020 as Fed officials say they may need to implement hikes faster than expected to curb the hottest inflation since the 1980s. Meanwhile, the Bank of Japan kept its negative interest rate, bond yield target and asset purchases unchanged at the end of its meeting Tuesday, a widely forecast decision given an overall inflation pulse that remains far weaker than in the U.S. and other major economies.
• The green-energy transition is poised to nearly triple India’s consumption of aluminum by the end of the decade, according to an industry group. The South Asian nation, which is home to some of the most polluted cities on the planet, has pledged to zero out emissions by 2070. Decarbonization will drive demand for aluminum-intensive solar power infrastructure, and higher use of the metal in other industries, pushing up consumption to 10 million tons a year by 2030, according to the Aluminium Association of India.
• Nickel’s biggest supply squeeze in more than a decade is drawing attention from the London Metal Exchange, as plunging inventories mean buyers are forced to pay massive premiums for immediately available metal. Cash contracts on the LME reached a $90-a-ton premium to those expiring a day later, the highest since 2010 and nearing levels seen in 2007 during a historic squeeze. The bourse has stepped up its monitoring of the nickel market in response, and may take further measures to ensure orderly trading if needed, a spokeswoman said by email. The turmoil in nickel is the latest example of acute supply stress in global metals markets, and represents the third time inside 12 months that the LME has stepped in to increase monitoring. Both copper and tin have seen wild price moves in recent months after exchange stocks shrank dramatically, sparked by surging demand and supply bottlenecks during the pandemic.
• Greece will support a strong European Union reaction to any Russian invasion of Ukraine, even as Athens called for improved relations between Moscow and the bloc, government minister Miltiadis Varvitsiotis said. Noting that Greece has complied with the EU’s “severe” sanctions since Russia’s 2014 incursion into Crimea, Varvitsiotis —  whose position as alternate foreign minister includes responsibilities for European affairs — said similar measures will follow “if something new were to occur that jeopardizes the stability, security and integrity of Ukraine.” Greece’s desire to maintain its ties with Moscow “by no means undermines our responsibilities or our commitment to the solidarity and unity of both NATO and the EU,” Varvitsiotis said during an interview in Athens.
• The European Union’s commissioner for financial services said she will propose extending a temporary waiver that allows its banks and money managers to clear trades in the U.K. through to June 2025. “We envisage proposing an extension of the equivalence decision to three years until the end of June 2025,” Mairead McGuinness said at an ECOFIN meeting in Brussels Tuesday. The existing temporary waiver expires in June this year. The EU has been pushing for more financial activity to move into the bloc but both U.K. and European banks, investment managers and hedge funds had called on the Commission to extend their access, warning of significant market disruption.
• Hong Kong is culling thousands of small animals, after nearly a dozen hamsters imported from the Netherlands and sold at a local pet store were found to be infected with delta and are suspected of having spread Covid-19 to humans. In South Africa, lions and pumas at a zoo got severe Covid-19 from asymptomatic zoo handlers, raising concerns variants could emerge from animal reservoirs.  China halted ticket sales to the general public for the 2022 Winter Olympics and instead will invite small groups of spectators to attend the games. Those who do get to attend will be required to have received a booster shot and will see their movement limited before and after events. A study from Israel suggests a fourth dose of the Pfizer-BioNTech vaccine would not be significantly effective at preventing the omicron variant of the coronavirus.
• Investors added money to exchange-traded funds that buy emerging market stocks and bonds last week. This was the third 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 $2.98 billion in the week ended Jan. 14, compared with gains of $480.6 million in the previous week, according to data compiled by Bloomberg. This was the biggest weekly inflow since April 2. So far this year, inflows have totalled $3.46 billion.
• Technology stocks are out of favor, while previously shunned bank shares are popular again, as a persistent jump in bond yields is turning markets upside down this year. The ongoing rout in tech stocks — a no-brainer pick for more than a decade — looks to be more than a short-term pullback: Bank of America Corp.’s January global fund manager survey showed that net allocation to the sector fell 20% month-over-month to 1%, the lowest since 2008. At the same time, overweight positions on bank stocks rose to 41% among BofA’s clients, closing in on a record set in October 2017. The stampede out of tech continued on Tuesday, with futures contracts on the Nasdaq 100 falling as much as 2.1% while yields on U.S. 10-year Treasury notes hit a two-year high of 1.85%. The tech-heavy Nasdaq is now down 4.3% this year, while the KBW Bank Index of U.S. lenders has jumped 11%.
• Alibaba Group Holding Ltd. fell more than 4% after Reuters reported that the U.S. is reviewing potential threats to national security posed by its cloud service, one of the world’s largest. The Commerce Department’s Office of Intelligence and Security is examining the way the business, known as Alicloud, stores and handles clients’ data and whether China could gain access to that information, Reuters reported, citing three people briefed on the matter. The review encompassed personal data as well as intellectual property, the news agency reported. An investigation, which Reuters said was launched by the Biden administration, compounds Alibaba’s regulatory issues back home, where it’s swallowed a record fine for anti-competitive and continues to grapple with scrutiny from Beijing over its handling of data. Alibaba declined to comment to Reuters.
• A trade association representing major U.S. airlines asked Transportation Secretary Pete Buttigieg and the nation’s top communications and aviation regulators to prevent wireless carriers from implementing 5G services close to airports. Airlines for America warned in a letter Monday that the traveling and shipping public could see “catastrophic disruptions” if the new C-band frequencies were put into service within two miles of where aircraft fly. The association said it was willing to work with the government and carriers to find a mutually agreeable solution. Wireless carriers including AT&T Inc. and Verizon Communications Inc. reached an agreement with federal regulators earlier this month to launch the new service on Jan. 19. Airlines are worried the signals could interfere with instruments that measure an aircraft’s altitude, after the Federal Aviation Administration limited certain flights landing near 5G towers.
• Citigroup Inc., which has been shedding some of its retail operations as part of a global revamp, is in advanced talks with Taiwan’s Fubon Financial Holding Co. for a sale of its mainland China consumer business, people familiar with the matter said. Taipei-based Fubon has emerged as the likeliest buyer after outbidding rivals, and the two lenders are negotiating the terms of a potential transaction, the people said, asking not to be identified as the information is private. Both are aiming to sign an agreement in the coming weeks and the assets could be valued at about $1.5 billion, the people said.  A deal would help Fubon strengthen its foothold in the mainland, where it acquired a controlling stake in Shanghai-based First Sino Bank in 2014 and later changed its name to Fubon Bank China, according to its website. Fubon is Taiwan’s second-biggest financial holding company by assets.
• A blank-check firm started by serial dealmaker Chamath Palihapitiya and Suvretta Capital is merging with medical technology company ProKidney, according to a statement, confirming a Bloomberg News report earlier this month. Social Capital Suvretta Holdings Corp. III and ProKidney will have a combined equity value of $2.64 billion, the companies said. The transaction also includes a $575 million equity placement that will provide ProKidney with as much as $825 million in cash proceeds, assuming investors in the special purpose acquisition company don’t redeem their shares. The $575 million private investment in public equity is led by a $125 million investment from Palihapitiya’s Social Capital, and includes $50 million from ProKidney’s existing investors, about $30 million from Suvretta Capital’s Averill strategy and the remainder from institutional investors and family offices, the statement shows.
• Beyond Omicron and gold medal tallies, athletes arriving in China’s capital for the Winter Games next month may have one more thing to worry about: is it safe to access the internet? Beijing has promised the world’s top athletes access to a partially unfettered internet during the Olympics starting Feb. 4, dropping the Great Firewall that blocks services like Facebook and YouTube at official venues and hotels. But security experts say there are reasons to exercise caution. Chinese companies that specialize in data collection, surveillance and artificial intelligence are among the official sponsors and suppliers for the Winter Olympics. Washington and its allies have accused some of the corporations providing networking and data management, including Huawei Technologies Co.and Iflytek Co., of potentially being used for espionage or surveillance of minorities in Xinjiang. Huawei and its peers deny those allegations, but cybersecurity consultants warn that those systems will subject athletes to the same kind of surveillance, movement tracking and monitoring that most Chinese citizens deal with.
• The balance sheets of Ireland’s biggest banks have risen by two thirds since the Brexit vote, the latest data to demonstrate how Europe’s financial landscape is shifting following the U.K.’s departure from the European Union. Banks in Ireland regulated by the ECB’s Single Supervisory Mechanism saw their balance sheets increase from 300 billion euros ($342 billion) in December 2015 to 500 billion euros in July, trade group Banking & Payments Federation Ireland and its affiliate the Federation of International Banks in Ireland said in a report Tuesday. Since the Brexit vote in June 2016, Citigroup Inc., Barclays Plc and Bank of America Corp. have all set up or expanded units in Ireland that fall under the ECB’s supervision. The main Irish retail banks were already under the ECB’s remit.
• Boris Johnson’s former top aide Dominic Cummings accused the prime minister of lying to Parliament, saying he would “swear under oath” that the premier both was aware of and allowed a drinks party at Downing Street at the height of lockdown in the first wave of the Covid-19 pandemic. By saying Johnson misled lawmakers, Cummings is again upping the ante after a post earlier this month about a party in May 2020 left the prime minister fighting to save his career and apologizing to the House of Commons. The charge is especially sensitive because many Tory MPs have said they are waiting for the result of a government probe into the party — as well as other allegations of pandemic rule-breaking in Downing Street — before deciding whether Johnson has misled them and whether they still back his leadership.
• Europe’s car sales slid during December for a sixth month of declines in a row, showing the extent of the uphill battle automakers are facing in the chip supply crisis. Passenger car registrations dropped 22% last month to 950,218 vehicles, the European Automobile Manufacturers’ Association said Tuesday. New-car sales fell 1.5% last year, when automakers had their worst-ever showing since the association started tracking the market in the early 1990s. After predicting for months that the dearth of chips disrupting the global industry would ease, automakers’ expectations have deteriorated. Sourcing enough semiconductors will remain arduous this year, and the pandemic continues to weigh on consumer confidence. Renault SA last week said the shortage, which cost the carmaker 500,000 vehicles in lost production last year, will peak during the first six month and then slowly improve as more capacity is added.
• Ocean shipping rates are expected to stay elevated well into 2022, setting up another year of booming profits for global cargo carriers — and leaving smaller companies and their customers from Spain to Sri Lanka paying more for just about everything. The spot rate for a 40-foot container to the U.S. from Asia topped $20,000 last year, including surcharges and premiums, up from less than $2,000 a few years ago, and was recently hovering near $14,000. What’s more, tight container capacity and port congestion mean that longer-term rates set in contracts between carriers and shippers are running an estimated 200% higher than a year ago, signaling elevated prices for the foreseeable future. Large customers of sea-borne cargo like Walmart Inc. or Ikea have the heft to negotiate better terms in those deals, or absorb the added expense. Smaller importers and exporters — especially those in poor countries — that rely on carriers to haul everything from electronics and apparel to grains and chemicals, can’t easily pass those costs along or weather long periods of stretched cash flows. The situation is throwing a spotlight on the market concentration of shipping lines, and their legal immunity from antitrust laws.
• A strong wave of coronavirus infections driven by the omicron variant could hasten the end of pandemic disruptions as it appears to cause less severe illness and provides protection against the delta variant, South Africa-based researchers said. A laboratory study that used samples from 23 people infected with the omicron variant in November and December showed that while those who previously caught the delta variant can contract omicron, those who get the omicron strain can’t be infected with delta, the researchers said. While omicron is significantly more infectious than delta, hospital and mortality data in countries including South Africa — the first country to experience a wave of omicron infections — appears to show that it causes less severe disease. The study shows that omicron can displace delta, the researchers led by Alex Sigal of the Africa Health Research Institute said.
• China’s central bank pledged to use more monetary policy tools to spur the economy and ease credit stress as signs of a property market slump worsens. The People’s Bank of China will “open monetary policy tool box wider, maintain stable overall money supply and avoid a collapse in credit,” Deputy Governor Liu Guoqiang said Tuesday at a briefing in Beijing. The central bank will roll out more policies to stabilize economic growth, front-load actions and make preemptive moves, he said. It will address common concerns in the market in a timely manner and stay ahead of the market curve, he said.
• Exxon Mobil Corp. announced what it described as an “ambition” to eliminate greenhouse gas emissions from its operations by 2050, the first time the oil giant has made such a long-term pledge on carbon.  Over the next two years, Exxon will develop roadmaps for all its major facilities around the world to zero out emissions, the Irving, Texas-based company said Tuesday in a statement. The plans will apply to so-called Scope 1 and 2 emissions of Exxon’s operated assets, which exclude customer emissions, from burning gasoline for example. While Exxon’s new pledge falls short of European peers like Royal Dutch Shell Plc and BP Plc, it’s a major step for the oil producer, which has been slower than some of its rivals to address climate change. It comes less than a year after shareholders voted to replace a quarter of Exxon’s board with new directors following an activist campaign by Engine No. 1 that questioned the company’s climate strategy.

*All sources from Bloomberg unless otherwise specified