January 26, 2023

Daily Market Commentary

Canadian Headlines

  • Canada’s Tiff Macklem was the first Group of Seven central banker to adopt outsize rate hikes to tame runaway inflation, saying that big increases would boost the odds of a soft landing later on. Now his argument is being put to the test. After raising its overnight lending rate to 4.5%, a 15-year high, the Bank of Canada said Wednesday it expects to hold until it can see how Canada’s economy and its heavily indebted consumers are dealing with elevated borrowing costs. “We know it takes time for higher interest rates to work through the economy to slow demand and reduce inflation,” Macklem said. The rate-pause signal is another surprise from Macklem, one accompanied by a new central bank projection that says inflation will fall quickly, from 6.3% to about 3% by midyear, with a mild economic contraction at worst. It’s even possible that Canada could skate through this rate cycle with no recession at all. In doing so, Macklem, 61, has clearly put his reputation on the line. If he’s wrong about a soft landing — if inflation stays stubbornly high, or if the economy tumbles into a deep recession — it will be the central bank’s second major forecast error in his less than three years in the job. He’s already scorned by some Canadians for his actions during the pandemic, when he assured rates would stay low for a long time, prompting some to take on jumbo variable-rate mortgages to buy homes that are now dropping in value.
  • Canadian crude shipments to Asia are set to surge to the highest in more than a year as US refinery outages force producers to find new outlets for their oil. At least 7 million barrels of heavy-sour crude produced in Canada’s oil sands have been sold to Asian buyers for February loading, according to people familiar with the matter. That’s the most since January 2022, Vortexa data shows.  Unipec, the trading arm of China’s biggest state-owned oil refiner Sinopec, will take 3 million barrels, while PetroChina Co. and Indian refiner Reliance Industries Ltd. will each receive 2 million, said the people, who asked not to be named discussing confidential matters. Another 1 million barrels was sold to Repsol SA for Europe, the people said.

World Headlines

  • A premarket rebound in US tech shares lifted global equity sentiment on Thursday, as upbeat earnings guidance from electric carmaker Tesla Inc. and others assuaged recent disappointments. Contracts on the Nasdaq index rose about half a percent, with Tesla up about 8% in premarket New York trading, after the firm beat profit estimates and sales, and chief executive Elon Musk predicted a rise in vehicle sales this year. Its report, alongside those from International Business Machines Corp., relieved some of the sting of Microsoft Corp.’s dire sales warning that had sapped tech shares earlier in the week. However as the S&P 500 ends January with its best start to the year since 2019, there is a growing chorus of buyside and sellside voices saying the rally has no staying power, given pressure on earnings and central banks’ reluctance to ease policy while inflation remains near decade-highs. Canada for instance, cautioned it could return to raising rates, depending on economic data.
  • Stocks in Asia Pacific rose for a fifth straight day as investors in Hong Kong returned from Lunar New Year holidays that delivered a boost to consumption. The MSCI Asia Pacific Index climbed as much as 0.8% to the highest since April 22. Hong Kong-listed stocks rallied as data on spending and tourism during the three-day break signaled a recovery in demand is gaining traction in China. The Hang Seng Index closed at its highest since March. Benchmarks in South Korea, Indonesia and Singapore also rose as traders assessed the global economy’s prospects. Japanese stocks fell, while markets in Australia, China, India, Taiwan and Vietnam were closed.
  • Oil advanced as investors weighed the outlook for Chinese demand, while a weaker dollar made some commodities more attractive for buyers. West Texas Intermediate traded near $81 a barrel, after settling little changed on Wednesday. The number of virus-related deaths and severe cases at hospitals in China is now 70% lower than peak levels in early January, authorities said late Wednesday. That should aid a recovery in mobility and fuel consumption in the biggest oil importer. Crude has also benefited from a slump in the dollar, with a gauge of the greenback near the lowest since April. That drop — which makes raw materials priced in the US currency cheaper for overseas buyers — has been driven by expectations that the Federal Reserve may soften its rate hikes.
  • Gold eased from a nine-month high, as Treasury yields rose ahead of a slew of economic data that may offer clues on the Federal Reserve’s tightening path. The US will release fourth-quarter GDP figures later on Thursday, as well as weekly jobless claims. Recent economic data has indicated companies and consumers are suffering under tighter financial conditions, helping firm bets that the US central bank may be getting closer to pausing its rate-hike cycle. Bullion has surged since early November as cooler inflation data saw Fed officials tone down their hawkish rhetoric, causing the dollar and bond yields to decline. The metal is now on track for a third monthly gain, while holdings in bullion-backed exchange-traded funds have risen in recent days.
  • US natural gas futures extended declines below $3 amid mild winter weather that’s helped spark the worst selloff among the country’s commodities. Gas for February delivery traded as low as $2.857 per million British thermal units on Thursday on the New York Mercantile Exchange. Prices are at the lowest levels since May 2021 after dipping below $3 on Wednesday. Doomsday fears that suppliers wouldn’t be able to meet wintertime demand have been erased by a confluence of factors, leading gas prices to plunge after hitting a 14-year high of $10.03 in August.
  • American Airlines Group Inc. expects profit this year to exceed estimates as the industry recovery stretches into 2023, buoyed by steady demand from leisure passengers and a rise in mixed work-personal trips. Full-year adjusted earnings will be $2.50 to $3.50 a share, the Fort Worth, Texas-based carrier said in a statement Thursday that also detailed fourth-quarter results. Analysts had expected $1.89 on average, according to estimates compiled by Bloomberg. American joined several of its largest rivals anticipating strong travel trends will continue this year despite inflation and threats of a recession. Industry profits have gotten a boost from high ticket prices, driven by a combination of heightened demand and limited growth amid delayed aircraft deliveries and a pilot shortage. American has said it will remain as much as 5% below pre-pandemic capacity this year.
  • European Union member states have been told the bloc has the legal authority to temporarily leverage at least €33.8 billion ($36.8 billion) of Russian central bank assets to help pay for the reconstruction of Ukraine, according to people familiar with the matter. The bloc’s Council Legal Service told diplomats that such a plan is legally feasible, as long as the assets aren’t expropriated and certain conditions are met, the people said. Those include a termination date, a focus on liquid assets and clarity that the principal and interest would be returned to Russia at some point, the people said. The EU has been exploring options to use frozen Russian assets following Moscow’s invasion of Ukraine, but the proposal is controversial and and discussions are at a very preliminary stage. EU officials and some member states have been worried about the legal justifications for such a move and the precedent that could be set, particularly for the use of frozen Russian central bank assets.
  • Morgan Stanley fined some of its own bankers more than $1 million each for conducting business on WhatsApp and other messaging platforms, the latest fallout from an industrywide probe that saw US regulators impose the record penalties for monitoring lapses. The funds have either been clawed back from previous bonuses or will be docked from future pay, according to a person familiar with the matter, who asked not to be named as the information has not been made public. Morgan Stanley is the latest bank to require individual staff to bear some of the burden of an unprecedented regulatory investigation, after it emerged that unapproved messaging platforms were being widely used to conduct business. Finance firms are required to scrupulously monitor communications involving their business to head off improper conduct.
  • The US and the European Union are discussing a possible deal on minerals and critical raw materials in a bid to allow the EU to qualify for benefits in President Joe Biden’s massive new green investment plan, according to people familiar with the matter. The Inflation Reduction Act, which includes roughly $500 billion in new spending and tax breaks over a decade to promote US manufacturing and services, offers certain exceptions for countries that have free-trade agreements with the US. A deal on key materials used in electric vehicles and batteries could allow the EU to access some of those advantages, said the people. The law’s focus on spurring American industry angered trade partners from Asia and Europe who saw it cutting them out of the US market, particularly for automobiles. The US Treasury Department late last year signaled that some benefits could go to nations with trade agreements with Washington, which the EU doesn’t already have. Secretary Janet Yellen said in an interview published earlier this week that the issue could be resolved with new deals related to minerals.
  • One year after Blackstone Inc. Chief Executive Officer Steve Schwarzman told investors the firm would reach $1 trillion in assets under management in 2022, it’s shy of that mark. The world’s largest alternative asset manager commanded $975 billion at the end of last year, up from $951 billion in the prior quarter, short of the milestone its senior leaders once thought was just around the corner. The target was originally set for 2026, but was accelerated amid a market boom. Now the private equity giant is feeling the weight of higher interest rates on its valuations of some past investments and is confronting an era of investor caution as it tries to gather cash for new bets. President Jon Gray said he wasn’t disappointed over missing the target, expressing confidence that investors will entrust more money if the firm delivers.
  • The US Federal Trade Commission filed its lawsuit to block Microsoft Corp.’s $69 billion takeover of gaming company Activision Blizzard Inc. in December partly to get ahead of its European counterparts and dissuade them from accepting a settlement allowing the deal, according to people familiar with the investigations. The FTC filed a complaint challenging the merger on Dec. 8, hours after a call between US and European Union officials about their respective probes, said one of the people, who asked not to be identified because the discussions were confidential. The EU officials indicated on the call they intended to begin talks with Microsoft about potential remedies, the person said. That prompted the FTC to file its case the same day to send a strong signal to EU Competition Commissioner Margrethe Vestager and her staff, the people said, even though technically the commission wouldn’t entertain remedy proposals from the companies until later in the process.
  • Tesla Inc. shares rose after Elon Musk teased potential for the carmaker to produce 2 million vehicles this year and minimize the effects of drastic price cuts to its electric vehicles. The EV market leader said it will increase output “as quickly as possible,” in line with its long-standing goal to grow by 50% annually over multiple years. While Tesla initially said it expects to make about 1.8 million vehicles this year, Musk said during a call to discuss better-than-expected quarterly earnings that 2 million is possible. In plowing ahead with expansion, the chief executive officer is countering concerns that consumer interest in Tesla’s cars hasn’t kept up with its rapidly increasing production capacity. A streak of quarterly deliveries that came up short of expectations and Musk’s preoccupation with Twitter Inc. contributed to Tesla’s stock plunging 65% last year.
  • Renault SA and Nissan Motor Co. plan to rejuvenate their two-decades-old cooperation with a range of industrial projects alongside an impending agreement to rebalance capital ties to improve a partnership that has become tense. The partners are set to work on five projects initially, people familiar with the situation said. One of them involves India, where the companies operate a plant in Chennai making small cars, engines and gearboxes, and another joint work on commercial vehicles, said the people, who asked not to be identified because the plans aren’t yet public.  The desire to agree on fresh common projects as part of the three-way pact, also including junior partner Mitsubishi Motors Corp., signals the companies see a joint future for the alliance that had to be pieced together again after 2018’s arrest of former leader Carlos Ghosn. While there’s little indication about the potential significance of the planned projects, Renault-Nissan can ill-afford to waste synergies in the increasingly competitive shift to electric cars.
  • Through wars, recessions, depressions and the pandemic, the US has benefited from Treasury debt being the closest thing in the markets to risk-free. Now that hard-earned reputation may be shoved over the edge of a very tall cliff. Fights over the government debt ceiling have become routine in Washington throughout the past quarter-century. This one promises to be especially dangerous, partly because of commitments Kevin McCarthy is said to have made to far-right lawmakers seeking deep budget cuts in exchange for their support of his becoming speaker of the House. Even a short-lived halt in Treasury payments—whether interest owed to bondholders, salaries for federal workers or benefits to Social Security recipients—would elicit a swift and potentially devastating market reaction. Stock prices would plunge and borrowing rates would spike. A full-blown financial crisis cannot be ruled out.
  • Dow Inc. plans to cut about 2,000 jobs as the chemical maker seeks $1 billion in cost savings and confronts higher energy costs and a slowing economy. The company said it will shut down certain operations, “particularly in Europe” in response to the challenges. Dow is also reducing purchases of raw materials and seeking to cut logistics and utilities costs, according to a statement Thursday. Among other things, the maker of plastics, chemicals and agricultural products cited high energy costs in Europe, where gas and electricity prices surged in the wake of Russia’s invasion of Ukraine. The company said it will take a charge of $550 million to $725 million in the first quarter related to the measures.
  • Southwest Airlines Co.’s operations meltdown last month will lead to a first-quarter loss as the fallout extends into 2023 from a fiasco that led to thousands of canceled flights. Revenue in the first three months of this year will be reduced as much as $350 million through a combination of ongoing cancellations and reduced bookings, which Southwest attributed to the December disruptions. The carrier also expects non-fuel costs to rise as much as 4% in the period, up from a prior outlook of flat to up 2%, according to a statement Thursday that also revealed a worse-than-expected fourth-quarter loss. Chief Executive Officer Bob Jordan said the “current revenue and cost trends” will lead to a net loss in the first quarter, without disclosing a specific range. Analysts had expected profit of 20 cents a share on average, according to estimates compiled by Bloomberg.
  • Comcast Corp. topped Wall Street profit estimates in the fourth quarter despite continuing to lose customers in its cable and broadband businesses. Earnings excluding special items were 82 cents a share, helped by gains from studios and the theme-park business. Analysts were expecting a profit of 77 cents.  Peacock, the company’s streaming-video platform, added 5 million new subscribers in the quarter. The money-losing service ended the year with more than 20 million customers. Comcast shares slipped 0.3% at 7:39 a.m. in premarket trading. The stock had fallen 19% over the 12 months ended Wednesday, while cable peer Charter Communications Inc. dropped 28%.
  • Toyota Motor Corp. elevated Lexus President Koji Sato to chief executive officer, replacing the long-serving Akio Toyoda as the the world’s No. 1 carmaker navigates the auto industry’s once-in-a-generation shift toward electrification and greater automation.  Toyoda, grandson of the Japanese car giant’s founder, becomes chairman effective April 1, the company said in a statement Thursday. He became CEO more than a decade ago and oversaw Toyota’s rise to become the world’s bigger maker of cars. Sato, 53, takes on leadership of Toyota at a watershed moment. The carmaker is facing criticism for its reluctance to plow headlong into electric vehicles, instead spreading its bets across various technologies such as battery-based EVs, hybrid technology, hydrogen-powered cars and traditional combustion vehicles.







*All sources from Bloomberg unless otherwise specified