January 18, 2023

Daily Market Commentary

Canadian Headlines

  • Bank of Montreal has received approval from the the Federal Reserve to acquire San Francisco-based Bank of the West, a combination that will create the 15th-largest US lender. After the transaction, Bank of Montreal US subsidiary BMO Financial Corp. will have consolidated assets of $286.8 billion, representing about 1% of those held by insured depository institutions in the US, according to the Fed. The Office of the Comptroller of the Currency also said it green-lit the merger. Bank of Montreal said it expects the deal will close on Feb. 1. “We look forward to working with communities across our expanded U.S. footprint to help drive meaningful change at the local level through a strong combination of financial and community-driven investment,” David Casper, the bank’s US head, said in a statement.
  • Pembina Pipeline Corp. “unjustly discriminated” against a unit of China National Offshore Oil Corp. by blocking access to an oil terminal in Alberta, the Canada Energy Regulator ruled. The ruling, issued Tuesday in Calgary, came after Cnooc Marketing Canada, which operates oil sands production wells in the province, filed a complaint last year. The unit of the Chinese oil giant said its rights were violated in 2021 when Pembina prevented it from shipping hydrocarbons from the Woodland Pipeline to a tank at the Edmonton Terminal that it subleased from Pembina. Pipelines have often become focal points for conflict between energy companies in Alberta, where oil producers face a shortage of conduits for transporting crude and gas. Companies including Enbridge Inc. and TC Energy Corp. have been embroiled in regulatory disputes with firms that use their pipelines.

World Headlines

  • European stocks were muted as investors mull the pace of central bank rate hikes and as focus shifts to corporate earnings. The Stoxx Europe 600 Index was up 0.1% as of 10:10 a.m. in London, set for the longest winning streak since November 2021. Europe’s main equities gauge has now risen over 19% from a Sept. 29 low. Closing 20% or higher from that level will make it the last major European index to enter a bull market. Elsewhere, the UK FTSE 100 was steady, trading near 2018’s record peak. Data this morning showed UK inflation dipped for a second month in December, boosting hopes that the worst cost-of-living crisis in a generation may be starting to ease.
  • U.S. equity-index futures posted modest gains as investors remained on the edge over the direction of monetary policy and corporate earnings. The yen slid against the dollar after the Bank of Japan kept monetary settings unchanged. Contracts on the S&P 500 and Nasdaq 100 indexes were 0.2% higher each after a choppy session in New York Tuesday amid diverging results from Wall Street banks. A gauge of the dollar’s strength slid despite gains against the yen. Treasuries advanced after the BOJ voted unanimously to maintain its yield curve control program. West Texas Intermediate oil futures headed for the longest streak of gains in four years amid bets for improved demand from China.
  • Asian stocks edged higher as Japanese shares advanced after the Bank of Japan announced no change to its yield curve control policy, countering broader caution ahead of the Lunar New Year holidays. The MSCI Asia Pacific Index erased an earlier loss of as much as 0.7% to rise 0.5%, lifted by communication services and health care shares. Japanese equities jumped as the yen fell after the BOJ kept policy on hold, pushing back against intense market speculation of policy change by ramping up the defense of its stimulus framework. The MSCI Asian stock benchmark has gained more than 20% from an October low to enter a bull market, outperforming US and European peers. Japanese stocks have underperformed, with the Nikkei down almost 1% in the same span, hurt in part by the BOJ’s December move to widen a band on bond yields.
  • Oil advanced to trade at its highest since early December on optimism that Chinese demand will recover. West Texas Intermediate climbed above $81 a barrel, building on a modest gain on Tuesday and last week’s jump of more than 8%. While global oil markets are set to face a bigger surplus than expected in the first quarter, they will tighten in the second half, the International Energy Agency said in its latest outlook. Average demand is also poised for a record this year. With prices on a tear, key market gauges are showing signs of renewed optimism. The difference between the nearest two WTI December contracts — a favored speculative trade among hedge funds — is the biggest in two months. US crude futures rose for a 9th day on Wednesday, the longest run since January 2019.
  • Gold steadied ahead of economic data that could offer further clues for the path of Federal Reserve interest-rate hikes. The precious metal has rallied since the end of October, hitting an eight-month high on Monday, amid signs that the Fed was becoming less hawkish. That followed months of declines when monetary tightening weighed on the non-yielding asset. Spot gold added 0.2% to $1,911.91 an ounce as of 9:28 a.m. in London, after falling 0.4% on Tuesday. The Bloomberg Dollar Spot Index edged lower. Silver and palladium gained, while platinum was little changed.
  • UK inflation dipped for a second month in December, boosting hopes that the worst cost-of-living crisis in a generation may be starting to ease. Consumer prices rose 10.5% from a year earlier, the Office for National Statistics said Wednesday. That’s slower than the 10.7% gain in November and a peak above 11% in October, when domestic energy bills surged. The data “suggests the peak has now passed” for inflation, said David Bharier, head of research at the British Chambers of Commerce. “But this simply means that prices will stabilize at a much higher level than one year ago.”
  • US mortgage rates fell to a four-month low last week, supporting more home purchases and refinancing. The contract rate on a 30-year fixed mortgage decreased 19 basis points to 6.23% in the week ended Jan. 13, according to Mortgage Bankers Association data released Wednesday. That helped boost total applications by nearly 28% in the week, though the data can be volatile around major holidays. Even with last week’s advance, the refinancing index remains historically depressed. Mortgage rates have skyrocketed in the last year as the Federal Reserve increases borrowing costs to rein in inflation, which has hampered activity in the housing market.
  • Everyone knows that past performance doesn’t predict future results. That’s turning out to be a good thing for one of the most popular investment strategies. Portfolios divided between 60% stocks and 40% bonds were hammered last year with an annual loss of about 17%, the worst since the financial crisis of 2008. But the severity of the bond market’s selloff pushed yields up so much that analysts at BlackRock, AQR Capital Management and DoubleLine expect the fixed-income securities to breathe new life into the 60/40 portfolios. The view is supported by expectations that the Federal Reserve is nearing the end of its interest-rate hikes as inflation comes down from its peak. If that proves to be correct, it would reduce the risk of another slide in bond prices and allow them to serve the traditional role of a stock-market hedge if a recession drags equities lower.
  • Germany will likely miss its targets for onshore wind expansion this year, according to an industry report, as the government struggles to double capacity by 2030. Europe’s industrial powerhouse is turning to renewables to replace Russian pipeline gas and phase out nuclear energy by mid-April. So far, just 58 gigawatts of onshore wind capacity have been installed, barely half its goal for 2030. Only 2.1 gigawatts of net capacity was added in 2022. To speed up expansion, Germany has defined renewable energies as in the public interest. Investors are also being incentivized, with maximum rates increasing by 25% at the next tender on Feb. 1 to compensate for higher installation and operational costs as well as rising interest rates. A record of almost 13 gigawatts of capacity will be tendered at auctions this year.
  • Amazon.com Inc. is set to begin a round of layoffs ultimately affecting more than 18,000 employees in the largest job cull in its history, which it announced earlier this month. The cuts come as the retailer grapples with slowing online sales growth and braces for a possible recession affecting the spending power of its customers. The eliminations started last year and initially fell hardest on Amazon’s Devices and Services group, which builds the Alexa digital assistant and Echo smart speakers. The latest round, scheduled to commence Wednesday, will mostly affect the retail division and human resources. While the cuts represent only about 1% of the total workforce, which includes hundreds of thousands of hourly warehouse and delivery personnel, they amount to about 6% of Amazon’s 350,000 corporate employees around the globe.
  • A group including Tesla, Glencore and Volkswagen has started a pilot for tracking an electric car’s battery from mine to recycling, stepping up efforts on transparency amid tightening global regulation on environmental and labor practices. The Global Battery Alliance unveiled a prototype digital twin of a physical battery at the World Economic Forum in Davos on Wednesday, using data from Tesla and VW brand Audi. The group, counting some 130 members and also backed by governments including Germany and Canada, aims to develop a full so-called battery passport by 2030. Consumers can access the passport via scanning a QR code to show example data from one Tesla model and two Audi EVs. It includes partial reporting of a battery’s carbon footprint, material provenance, chemical make-up and manufacturing history. The prototype currently relies on data provided by stakeholders. The alliance later plans to move to benchmarking data and issue quality seals based on sustainability performance.
  • The first helicopters in Australia’s new fleet of US-designed Black Hawks will arrive by the end of the year, Deputy Prime Minister Richard Marles said, further strengthening security ties between Canberra and Washington. The purchase of 40 Black Hawk helicopters for about A$3 billion ($2.1 billion) was confirmed by Australia’s Department of Defence on Wednesday. Marles, who is also the defence minister, said the new aircraft would replace Australia’s Taipan choppers, which have seen repeated maintenance issues in recent years. Washington approved the sale in August 2022, with the US Defense Security Cooperation Agency saying at the time that the Australian purchase would support “the foreign policy and national security objectives of the US.”
  • The impact of China’s recovery was a major topic on the second day of the World Economic Forum in Davos, with the head of Abu Dhabi’s $284 billion wealth fund flagging a new pivot to Asia and his counterpart in Norway warning it could unleash a surge in global inflation. The International Monetary Fund’s No. 2 official earlier said the global economy has shown “signs of resilience,” and European Central Bank Governing Council member Francois Villeroy de Galhau predicted that the euro region should avoid a recession this year, in line with the general tone of cautious optimism at the event in the Swiss Alps. A speech by German Chancellor Olaf Scholz, the only Group of Seven leader due to attend the event, is one of Wednesday’s highlights. Scholz spoke with Bloomberg Editor-in-Chief John Micklethwait in Berlin on Tuesday and said he’s convinced Europe’s biggest economy won’t contract in 2023 and that he is in talks with allies about sending battle tanks to Ukraine.
  • The European Union may dodge recession this year as gas prices come down and recovery fund spending feeds into the economy, Commission Vice President Valdis Dombrovskis told Bloomberg TV. “Since autumn we have seen some positive signs,” Dombrovskis said in Brussels on Wednesday. Energy prices are “lower than previously expected because our gas storages were full at the beginning of the winter” and the weather has been relatively mild, he added. Dombrovskis also pointed to a price cap on Russian oil, and the EU’s crisis response including its recovery plan helping the economies of member states. “So indeed we are expecting shallower economic contraction around the turn of the year than it was expected previously, maybe we can also escape this technical recession,” he said.
  • The White House is weighing a range of executive actions to authorize and expand protections for renters, who pay a high share of their income toward housing nationwide and face little prospect of relief from the new Congress. Measures being mulled by senior Biden administration officials include sealing eviction records, standardizing rental leases and promoting a right to counsel for tenants facing off with landlords in housing court. Another possibility could be a federal campaign to curb discrimination against affordable housing voucher holders based on their source of income, a practice challenged as a fair housing violation. A decision about executive tenant protections could come as soon as this month, notwithstanding news of rents finally starting to cool, and follows multiple meetings between White House officials and tenants and advocates.
  • Netflix Inc.’s stock-market comeback is accelerating in the early days of 2023, and bulls are counting on signs of resilient subscriber growth to fuel another leg in the streaming-TV company’s rally. The stock has almost doubled from its 2022 low as viewers embraced popular titles like Glass Onion and Wednesday and analysts welcomed the launch of a cheaper ad-supported tier that should help it attract and hold on to customers. Investors will get insight into its early traction when Netflix reports fourth-quarter results Thursday. The shares don’t fully reflect the power of the ad business, said David Klink, senior equity analyst at Huntington Private Bank. The company also plans a crackdown on password sharing.
  • China will need its cautious consumers to start spending again in order to achieve stronger economic growth, but recent data shows just how difficult that goal may be this year. The biggest driver of the economy’s 3% growth last year was investment — or gross capital formation — which includes spending on durable assets such as buildings and also business inventory. That reverses the trend seen over most of the last decade, where consumption spending was the fastest growing component of demand for goods and services each year. On a per person basis, consumption actually fell last year, according to data released Tuesday by the National Bureau of Statistics, as income growth slowed sharply and households saved more. Households added a record 17.8 trillion yuan ($2.6 trillion) to their bank deposits in 2022.







*All sources from Bloomberg unless otherwise specified