The Daily – January 30, 2023

January 30, 2023

Daily Market Commentary

Canadian Headlines

• Rogers, Shaw and Quebecor agreed to extend the outside date of the proposed merger of Rogers and Shaw and the acquisition of Freedom Mobile by Videotron to Feb. 17. The companies continue to work with Innovation, Science and Economic Development Canada to secure the final approval needed to close deals.
• Four years after legalizing recreational marijuana, Canada will again display its progressive drug policy bona fides on Jan. 31, when a law to decriminalize the personal possession of hard drugs in British Columbia takes effect. The province will no longer criminally prosecute adults age 18 and over who are caught with less than 2.5 grams of hard drugs, including heroin, morphine, fentanyl, cocaine, methamphetamine and MDMA (aka ecstasy). Instead, they will be offered information on social programs and treatment, if they request it. Drug trafficking will remain illegal, regardless of the amount possessed. The experiment will last three years. Public health experts say the experiment faces long odds. Canada’s westernmost province has been ground zero for drug policy trials since 1959, when it opened the world’s first methadone clinic. Since then, it has tried several other so-called harm reduction programs, which espouse removing the criminal stigma from drug use to focus instead on users’ underlying social, economic and mental health issues.

World Headlines

• European stocks fell on Monday as investors took profit on the rally ahead of another round of rate hikes from central banks in the US, Europe and the UK amid fears of slowing economic growth. The Stoxx 600 was down 0.6% by 10 a.m. in London, taking the shine off one of its best-ever January performances. Technology, travel and leisure and real estate sectors led the declines. Europe’s benchmark index has seen a sharp rally this month, setting it on course for its second-best January gains ever after 2015, amid lower natural gas prices, slowing inflation and optimism around China’s economic reopening. However, an uncertain corporate earnings outlook and the possibility of a recession have tempered gains recently.
• US equity futures fell on Monday along with stocks in Europe as a note of caution crept in at the start of a week marked by interest-rate decisions and big-name company earnings on both sides of the Atlantic. Contracts on the S&P 500 dropped about 1% after Wall Street extended January’s stellar rally on Friday as traders brushed off disappointing outlooks from some of the world’s largest technology companies. Nasdaq 100 futures were down about 1.3%, though still heading for the best start to a year since 1999. Treasury yields rose. Federal Reserve officials are expected to raise rates by a quarter percentage point on Wednesday, dialing back the size of the increase for a second straight meeting, after recent data suggested the central bank’s aggressive campaign to slow inflation is working. Signs of earnings pressure, however, are raising concerns about the health of the economy and the outlook for equities.
• Asian stocks edged lower as traders braced for volatility in a potentially pivotal week packed with central bank decisions, while Chinese shares fell short of entering a bull market after reopening from a week-long holiday. The MSCI Asia Pacific Index fell as much as 0.6%, set to halt a six-day winning streak. Equity markets in South Korea and Hong Kong were among the biggest losers in the region. Taiwan outperformed as the benchmark jumped into bull territory. China’s CSI 300 Index pared a bulk of its gains to end just 0.5% higher even after a stream of positive consumption data during the Lunar New Year holidays, indicating that traders are waiting on new catalysts after a three-month rally. The purchasing managers’ index due Tuesday will offer a clearer picture on the state of the nation’s economy.
• Oil edged lower, along with broader commodities markets, as China’s return from Lunar New Year holidays failed to deliver hoped-for gains. West Texas Intermediate slid toward $79 a barrel after topping $81 last week. Risk-off sentiment permeated markets ahead of a Federal Reserve meeting Wednesday that’s expected to result in another rate increase. Oil has had a bumpy ride in recent months, with prices supported by the demand outlook in China but held back by concerns that the US could slip into recession. Some investors are speculating the Fed is now nearing the end of its tightening cycle.
• Gold dipped after a sixth weekly gain ahead of a Federal Reserve decision this week at which policy makers are expected to ease the pace of rate hikes. Bullion has rallied since early November on the prospect of less hawkishness, which spurred declines in the dollar and US bond yields. The Fed’s preferred inflation measure eased to the slowest annual pace in more than a year last month, providing more support to that view. Officials are widely expected to increase the key rate by a quarter point at the end of their two-day meeting on Wednesday, following a series of larger hikes in 2022. Attention will focus on whether there’s any softening of Chair Jerome Powell’s pledge to keep rates elevated for some time this year.
• Bitcoin is set for its best January since 2013 on bets that monetary tightening and the crypto-sector crisis are both ebbing. The largest token is up 40% since the turn of the year, a first-month gain bettered only twice before when crypto was in its infancy. Smaller coins like Solana, Axie Infinity and Decentraland have doubled in value, part of a $280 billion January climb in digital assets overall, CoinGecko figures show. Bitcoin retreated 2.5% to $23,200 as of 11:37 a.m. in London on Monday amid broad declines in risk assets.  The rebound from last year’s deep rout is part of a wider revival in risk appetite on expectations that central banks will slow interest-rate hikes and perhaps even cut borrowing costs later this year as high inflation moderates.
• Investors added money to exchange-traded funds that buy emerging market stocks and bonds last week. This was the 17th 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 $2.07 billion in the week ended Jan. 27, compared with gains of $3.31 billion in the previous week, according to data compiled by Bloomberg. So far this year, inflows have totalled $11.2 billion.
• Renault SA agreed to lower its stake in Nissan Motor Co., seeking to address a longstanding source of friction in their two-decade alliance to better compete in an industry moving to electrification and automation. The partners will each retain a 15% cross-shareholding with Renault transferring the remainder of its stake into a French trust for a coordinated sale when it’s commercially “reasonable” to do so, the companies said Monday. The plan still requires final approval from the companies’ respective boards. Renault, Nissan and junior alliance partner Mitsubishi Motors Corp. also plan to move forward via collaborations on specific projects, including in India, South America and Europe. Nissan will also invest in Renault’s carved-out electric-vehicle and software business Ampere, which is set for a listing, with a goal of becoming a strategic shareholder. Bloomberg News first reported on the pair coming to an agreement on the rebalancing and key projects in principle last week.
• Audi acquired a minority stake in the Formula 1 team Sauber Group this month as part of the Volkswagen AG premium brand’s bid to join the racing circuit in 2026. Audi, which announced the plan in October, declined to comment on the size or price paid for the stake. As part of the transaction, Audi’s general manager for technical development Julius Seebach will join Sauber’s board of directors, a spokesperson said Monday. Audi said the carmaker will build out its collaboration with Sauber while respecting the Swiss team’s contracts with other partners. VW gave Porsche and Audi the green light to pursue separate F1 entries after speculation swirled for months about the brands entering into the sport dominated by Mercedes-Benz AG. Audi’s decision to partner with the veteran Swiss racing team was the result of more than a year of talks that also centered on McLaren Group.
• Telecom Italia shares rise as much as 5% to lead gains on the FTSE MIB index on Monday after il Messaggero reported on Saturday that Italian state-backed lender Cassa Depositi e Prestiti may bid for the phone carrier’s landline network in a deal worth around €24 billion. The bid could take place between the middle and end of February, according to the report.
• Investors flocking to the equity rally will be disappointed as they’re in direct defiance of the Federal Reserve, according to Morgan Stanley strategists. “Better price action in stocks has started to convince many investors they are missing something — compelling them to participate more actively,” a team led by Michael Wilson wrote in a note. “We think the recent price action is more a reflection of the seasonal January effect and short covering after a tough end to December and a brutal year.” In reality, earnings are worse than expected, especially on the margins front, they said. “Secondly, investors seem to have forgotten the cardinal rule of ‘Don’t Fight the Fed.’ Perhaps this week will serve as a reminder.” Officials at the US central bank are poised to raise their benchmark federal funds rate by a quarter percentage point on Wednesday, dialing back the size of the increase for a second-straight meeting. The move would follow a slew of recent data suggesting the Fed’s aggressive campaign to slow inflation is working.
• BlackRock Inc. had predicted a market rotation into credit. And now, the asset manager’s exchange-traded credit funds are set for their biggest ever January inflows. Funds tracking broad high-grade and junk indexes in the U.S. and Europe have attracted a record amount of new money this month, based on data compiled by Bloomberg. The iShares iBoxx $ Investment Grade Corporate Bond ETF, together with its high-yield equivalent, have seen inflows of $5.6 billion. BlackRock ETFs tracking similar Euro-denominated indexes have seen a combined €1.7 billion ($1.85 billion) of additions in January. The flood of money into credit ETFs is part of a broader rush for corporate debt as investors seize the chance to lock in the highest yields in about a decade. At the same time, fears of a painful recession are subsiding and an aggressive central bank tightening program to tackle inflation is expected to ease up, boosting appetite for risk.
• The reopening of China’s borders will propel global air travel almost to pre-Covid levels by the middle of this year, according to Boeing Co., highlighting the country’s central role in driving passenger growth. Air travel worldwide was back to 77% of 2019 levels in December, and will now climb swiftly to close to 90% by the end of June as Chinese travelers return, Boeing Vice President of Commercial Marketing Darren Hulst said. “We’re going to see that be really the key area of momentum, the driver of growth and recovery in 2023,” Hulst said on a call with reporters. “The key is getting that pent-up demand back in the air.”
• The US Treasury is set to keep the size of its quarterly sale of longer-term securities unchanged in an announcement this week, with bond dealers seeing little scope for changes to issuance strategy amid a partisan battle over expanding the government’s borrowing authority. In its so-called quarterly refunding announcement on Wednesday, the Treasury is expected to hold the total size of auctions to be held next week at $96 billion — the same as in November — according to Wall Street strategists. While officials also typically provide some guidance on tweaks in broader issuance strategies, this time around dealers are expecting limited details given the debt-limit quagmire. The federal government earlier this month hit its statutory $31.4 trillion ceiling, prompting the deployment of accounting maneuvers to keep from running out of cash.
• President Joe Biden on Monday will help kick off a project to replace a 150-year-old rail tunnel in Baltimore that is seen as among the worst bottlenecks slowing train traffic on the Northeast Corridor. The visit is part of a renewed push to highlight projects funded by Biden’s signature infrastructure legislation in the new year.  Prospects for new legislative victories have dimmed with Republicans holding a narrow majority in the House of Representatives, leaving the White House to focus its efforts on implementing and championing legislation passed during the president’s first two years in office. The president will hold a meeting Wednesday with House Speaker Kevin McCarthy, where Republicans are expected to ask for federal budget cuts in exchange for raising the debt ceiling.
• Iran said one of its ammunition depots was attacked in a drone strike that’s stirred Middle East tensions as US Secretary of State Antony Blinken heads to Israel.  It’s not known who was behind the strike near the central city of Isfahan late Saturday and there’s been no official statement by Iran casting blame. But Tehran has often pointed the finger at regional foe Israel for similar incidents in the past.  The Wall Street Journal reported Sunday that Israel was responsible, citing unnamed US officials and people familiar with the operation. The aim was to look for new ways to contain Tehran’s nuclear and military ambitions, the report said.
• China hit back at a report that the US has confronted it with evidence suggesting some of its state-owned firms may be helping Russia’s war in Ukraine, saying Washington should stop sending weapons if it wants the conflict to end. China “would never add fuel to the fire, still less exploit the crisis,” Foreign Ministry spokesperson Mao Ning said Monday at a regular press briefing in Beijing. “The US is the one who started the Ukraine crisis and the biggest factor fueling it.” “Rather than reflecting on its own acts, the US has been sowing paranoia and pointing fingers at China,” she said. “We reject such groundless blackmail, and would not sit by and watch the US harm the legitimate rights and interests of Chinese companies.”
• LVMH and L’Oréal SA are among the luxury consumer companies weighing offers for a stake in Aesop that may value the high-end cosmetics brand at $2 billion or more, people familiar with the matter said. Japanese beauty group Shiseido Co. is also studying a potential bid for an interest in Aesop, the people said, asking not to be identified discussing confidential information. Aesop is owned by Brazilian cosmetics maker Natura & Co., which is working with Bank of America Corp. and Morgan Stanley as it explores the sale of a stake in the business, Bloomberg News reported last year.
• Shell Plc’s new chief moved to overhaul the energy major’s core business units just a month after taking the helm. Shell will combine its integrated gas and upstream divisions, and merge its downstream and renewables units, it said Monday. It’s the second significant announcement in a week after Chief Executive Officer Wael Sawan launched a strategic review of the company’s struggling European home-energy retail unit. Sawan is under pressure to boost shareholder returns that have lagged those of key competitors. There’d been speculation that a shakeup was on the cards after activist investor Dan Loeb called on the company to break off its liquefied natural gas, renewables and marketing divisions into a standalone business.
• Toyota Motor Corp. has struggled to effectively convey its strategy of spreading its bets between hybrid, hydrogen and battery-electric vehicles to investors, consumers and environmental groups. The approach has opened the world’s No. 1 carmaker up to criticism that it isn’t embracing an all-electric future. On one hand, that’s valid — Toyota sold fewer than 25,000 battery-electric vehicles last year, when Tesla Inc.’s cumulative deliveries passed the 3 million mark. On the other hand, Toyota has been making hybrids for more than two decades, with its flagship Prius alone racking up more than 5 million total sales. The Japanese giant argues that it’s doing its part to reduce emissions, is playing the long game, and will be among the businesses with the resources, technology and tenacity to pull off the transition to zero emissions that will take many years.
• United Parcel Service Inc. will pay more for labor after replacing a union contract that expires in July. The main question for Chief Executive Officer Carol Tomé is how much more — and if it’s enough to avoid a strike that would throw package delivery into chaos.  In what are likely to be the most contentious talks since UPS workers were on strike for 15 days in 1997, the Teamsters union, which represents 340,000 UPS employees, says it seeks to increase wages for part-time workers to more than $20 an hour and eliminate a controversial two-tiered wage system. On the table will also be demands for air conditioning in vehicles and for blocking inward-facing cameras. Teamsters President Sean O’Brien is promising a hard fight. He won election in late 2021 on a vow to get tougher with UPS and correct what he says was a flawed contract forced on workers in 2018. The union is also shortening the negotiation period with UPS. Talks on the nationwide contract will begin April 16, O’Brien said in an interview. The current contract ends on July 31.
• International Business Machines Corp. is offering Europe’s biggest company bond deal in ten months, days after saying it will cut thousands of jobs. The software and IT services giant is seeking to raise at least €2.3 billion ($2.5 billion) equivalent across four euro bonds and one sterling tranche on Monday, according to a person familiar with the matter, who asked not to be identified because they’re not authorized to speak about it. The notes’ maturities range from four to 20 years. The deal will be the largest corporate offering in Europe since GSK Consumer Healthcare UK Plc’s five part bond sale in March, and is a late boost to the busiest January on record for non-financial company debt sales in the region, according to data compiled by Bloomberg. Including IBM’s offering, issuers will have raised more than €41 billion this month, seizing on borrowing costs at the lowest since April and ferocious investor appetite for corporate bonds.

*All sources from Bloomberg unless otherwise specified