January 5, 2022

Daily Market Commentary

Canadian Headlines

• Canadian equities rose 0.06% on the index’s first trading day of the new year as surges in energy and financials offset steep losses in technology stocks. The S&P/TSX Composite advanced to 21,236.52 in Toronto. The move follows the previous session’s decrease of 0.3%. Shopify Inc. plunged 11%, the most since Nov. 2020, amid a broad sell-off in technology stocks. Canada’s largest technology company saw its market cap dip slightly lower than Royal Bank of Canada, returning the country’s largest lender the top spot as Canada’s most valuable company — a title it lost to Shopify in May. Toronto-Dominion Bank contributed the most to the index gain, increasing 2.4%. Lithium Americas Corp. had the largest increase, rising 16.4%.

World Headlines

• European stocks crept higher after a record close on Tuesday as traders considered the impact of higher bond yields on some of the frothier parts of the market.  The Stoxx Europe 600 Index was up 0.2% by 11:20 a.m. in London. Automakers outperformed, while utilities and food and beverage shares were lower. European equities have hit fresh peaks on optimism that the omicron variant of Covid-19 won’t force governments into fresh social restrictions. However, sentiment has been tempered by concerns of tighter monetary policy, which is particularly weighing on highly valued tech shares. Minutes from the U.S. Federal Reserve’s latest meeting are due to be published later.
• U.S. index futures traded marginally lower, with the selling concentrated in Nasdaq 100 contracts, signaling a rout in technology stocks may continue. Treasuries were mixed as investors weighed the Federal Reserve’s tightening path against the spread of the pandemic. Nasdaq 100 futures traded 0.4% lower amid caution over the impact of higher yields on equity valuations. S&P 500 Index futures were little changed. Data Tuesday showed mixed signs on U.S. inflation. Prices paid by manufacturers in December came in sharply lower than expected. However, figures showing a faster U.S. job quit rate added to concerns over wage inflation.
• Technology shares led a decline in Asian equity markets, with investors concerned about the prospects of higher interest rates and Tencent’s continued sale of assets. The MSCI Asia Pacific Index fell as much as 0.6%, the most in two weeks, dragged down by Tencent and Meituan. The rout in U.S. tech spilled over to Asia, where the Hang Seng Tech Index plunged 4.6%, the most since July, following Tencent’s stake cut in Singapore’s Sea. Declines in tech and other sectors in Hong Kong widened after the city tightened rules to curb the spread of the omicron variant. Most Asian indexes fell on Wednesday, with Japan an exception among major markets as automakers offered support. The outlook for tighter monetary policy in the U.S. and higher Treasury yields weighed on the region’s technology shares, prompting a rotation from growth to value stocks.
• Oil was steady after OPEC and its allies agreed to a scheduled increase in production for next month, and an industry report pointed to another decline in U.S. crude inventories. Futures in London traded near $80 a barrel. OPEC+ on Tuesday stuck to its planto add 400,000 barrels a day for February after it cut estimates for a surplus in the first quarter. The American Petroleum Institute reported U.S. stockpiles fell by 6.43 million barrels last week, according to people familiar with the data. Official government figures are due Wednesday. Oil finished 2021 on a strong footing as a string of global supply outages boosted sentiment. Consultant Facts Global Energy said the disruption — which in recent weeks has included Ecuador, Libya and Nigeria — totaled close to 1 million barrels a day.
• Gold held an advance as investors weighed the path for monetary policy tightening along with the recent rise in U.S. bond yields. Treasuries steadied following a rout amid increasing conviction the Federal Reserve will raise interest rates at least three times beginning in May to counter price pressures. Fed Bank of Minneapolis President Neel Kashkari — a noted dove — said he supports two rate increases this year. The surge in yields sent gold tumbling the most in six weeks on Monday, before prices regained some ground on Tuesday. Bullion quickly pared Monday’s loss “as investors try to figure out if Wall Street got a little too aggressive in pricing in Fed rate hikes for this year,” said Edward Moya, a senior market analyst at Oanda Corp. “The U.S. economy is still strong and, while the path for Treasury yields will be higher, gold will benefit from a weakening dollar as Europe and large parts of Asia will outperform this year.”
• Hong Kong will ban flights from eight countries, including the U.K. and U.S., and shut bars and gyms for two weeks as the city seeks to contain the spread of the omicron variant. As the new strain marches across the globe, Singapore’s infection rate rose at the fastest pace in nearly two months, cases is Israel hit a daily record and almost one in three people tested in the Philippines returned a positive result. Germany may tighten contact curbs to tackle an expected surge in infections in coming weeks, the health minister said. Regional governments in India are implementing an increasingly strict set of restrictions as the country finds itself in the grip of another wave.
• The U.K. is considering scrapping its pre-departure Covid-19 test requirement for vaccinated travelers entering the country, according to people familiar with the matter, after airlines hard-hit by the omicron variant lobbied for the rules to be eased. The government is likely to keep a mandate for vaccinated arrivals to quarantine until they’ve done a test within two days of entering the country, said the people, who asked not to be identified before a decision was made. Ministers are scheduled to hold their regular three-week review of travel rules on Wednesday. Easing the rules would bring some relief to airlines after the spread of omicron stifled air travel over the year-end holiday. While governments have tightened border rules in response to the new variant, evidence is growing that it produces milder symptoms than earlier Covid waves.
• Tencent Holdings Ltd. cut its stake in Singapore’s Sea Ltd. by selling $3 billion in shares, sparking a rout in the Southeast Asian gaming and e-commerce company. The deal will likely inflame speculation Tencent is planning to pare its holdings in some of China’s biggest tech names from Meituan to Kuaishou Technology, as it pivots toward overseas growth and new areas such as the metaverse. China’s social media and gaming leader controlled a portfolio of investments worth $185 billion at the end of September, Bloomberg Intelligence estimates. The share sale comes less than a month after Tencent said it would hand out more than $16 billion of JD.com Inc. stock as a one-time dividend, an effort to divest most of its stake in China’s No. 2 online retailer. The surprise move was seen as being in response to Beijing’s push to curb anticompetitive behavior and open up closed ecosystems.
• Investors gauging the likely timing of the Federal Reserve’s first interest-rate hike and its kick-off for shrinking a balance sheet now at a record $8.8 trillion will get fresh clues on Wednesday, with minutes of policy makers’ meeting last month. The U.S. central bank is on track to end its asset-buying program in March — opening the way for raising rates and running off some of its bond holdings — after it on Dec. 15 doubled the pace of tapering purchases. Minutes from the Federal Open Market Committee meeting will be released at 2 p.m. in Washington on Wednesday. Forecasts from Fed officials in the “dot plot” published alongside the policy statement showed the expectation for three quarter-percentage-point increases in the key federal funds rate target in 2022.
• Fledgling electric-vehicle maker Nikola Corp. is dropping its $2 billion patent lawsuit against rival Tesla Inc. as its founder continues to fight criminal charges that he misled investors. The companies have agreed to withdraw all claims and counter-claims against each other, according to a joint filing Tuesday in federal court in San Francisco. Nikola sued Tesla in 2018, accusing it of copying several of its patented designs, including those for a wrap-around U-shaped windshield, fuselage and side door.
• North Korea appears to have launched its first ballistic missile in about two months, after leader Kim Jong Un indicated he was more interested in bolstering his arsenal than returning to stalled nuclear talks with the U.S. North Korea fired what appeared to be a ballistic missile from land into waters off its east coast Wednesday, South Korea’s military said. The missile flew about 500 kilometers (310 miles) on a normal trajectory and landed in waters outside of Japan’s exclusive economic zone, officials in Tokyo said. The flight path suggests North Korea launched a short-range ballistic missile. Japanese Prime Minister Fumio Kishida called the launch “extremely regrettable” and said his government would step up surveillance. North Korea’s most powerful ally, China, called on all parties to “act prudently” and stay in the right direction of talks and consultations, Foreign Ministry spokesman Wang Wenbin said at a regular press briefing in Beijing.
• Californian investigators said a power line owned by PG&E Corp. started the second-largest wildfire in the state’s history. The Dixie fire last year was caused by a tree contacting electrical distribution lines west of Cresta Dam, The California Department of Forestry and Fire Protection, known as Cal Fire, said in a statement on Tuesday. The July blaze torched nearly 1 million acres and destroyed over 1,300 structures, it said. The tree was one of more than 8 million within strike distance of PG&E lines, the company said in a statement. PG&E has committed to burying 10,000 miles of lines and will continue to be tenacious in its efforts to stop fire ignitions from its equipment, it said.
• The U.K. government is giving itself until April to find a solution to soaring gas prices since that’s when consumers would start feeling the bite of a new cap on utility bills. Energy regulator Ofgem is due to announce a new limit for some tariffs on Feb. 7, but ministers believe they have a couple more months to gauge whether any assistance is needed to help alleviate the impact, according to a person familiar with the matter who asked not to be identified because the discussions are private. Business Secretary Kwasi Kwarteng will meet with utility bosses Wednesday. The measures under discussion include an industry proposal for loans to help suppliers delay some of the April increase, as well as cuts to the Value Added Tax charged on bills.
• The epic fight over who controls the future of the car industry is about to get a whole lot more interesting. Tesla Inc., the pioneer and pacesetter, has dominated the early rounds of the new-energy age, capturing investors’ imaginations with a vision for what the next generation of vehicles looks like and seizing the nascent market for fully electric cars. In the other corner are giants of scale: Volkswagen AG and Toyota Motor Corp. The world’s two biggest automakers — each sold roughly 10 or 11 cars for every one Elon Musk did last year— realize the age of the battery-powered vehicle is here and are gaming out how to stay on top.
• French President Emmanuel Macron took Europe’s aggressive stance against the unvaccinated up a notch, saying he wants to “p— off” people who don’t get their Covid-19 shot. as possible their access to activities in social life.” The comments sparked an angry response from opposition politicians in France, and led to Parliament suspending a debate on new virus restrictions. The session is due to resume Wednesday afternoon, and some lawmakers are demanding that Prime Minister Jean Castex shows up to explain the remarks.
• German energy giant Uniper SE was forced to borrow billions to pay down margin calls — the collateral that exchanges require to back up trades — as European gas and electricity prices rallied. Uniper got additional loans totaling 10 billion euros ($11.3 billion) from its Finnish parent Fortum Oyj and KfW IPEX-Bank, the company said in a statement after the close of trading on Tuesday. The borrowing facilities correspond to about two-thirds of the company’s market value of just over 15 billion euros. With gas and power prices repeatedly rising to records since July, many companies that had fixed energy prices are now having to post more collateral to guarantee those trades. Still, any losses from those hedges might be offset by higher realized prices in the spot market. RBC Capital analysts said Wednesday they expect “no real impact on near-term earnings” for Uniper.
• President Joe Biden will mark the first anniversary of the deadly Capitol insurrection seeking to rally Democrats around voting rights legislation, with a warning that inaction risks emboldening extremist followers of former President Donald Trump before the crucial midterm elections. The president and his allies in Congress plan a full slate of events Thursday marking the Jan. 6 riot, preaching unity to a politically fractured nation — and members of his own party, divided for months over legislative priorities including new social safety programs, climate initiatives and voter protections. Yet Biden’s task has been complicated by Trump himself. The former president has turned Jan. 6 into a fealty test for fellow Republicans by obliging them to reject the new administration and accept his revisionist account of the deadly attack waged by his supporters to disrupt certification of his electoral defeat.
• HBO Max subscribers reached about 73.8 million at the end of 2021, topping the high end of owner AT&T Inc.’s forecast, placing the service in the upper tier of streaming platforms vying for the world’s viewers. Hits including “The Sex Lives of College Girls,” a “Sex and the City” spinoff and “Succession” helped HBO Max add subscribers in the fourth quarter. In October, Dallas-based AT&T had forecast a range of 70 million to 73 million total subscribers for the end of the year.  The company is in a race globally to catch up with streaming rivals Netflix and Disney+, which have more than 200 million and 100 million subscribers respectively. Last May, AT&T agreed to merge its WarnerMedia business, which includes HBO Max, with media giant Discovery Inc. to bulk up against those bigger competitors.
• U.S. stock investors should brace for a correction in upcoming months, Wells Fargo & Co. strategists said, joining a chorus of warnings that Wall Street is in for a bumpier ride after last year’s powerful rally.  “Pullbacks will likely be more frequent in this choppier equity market,” the strategists led by Christopher P. Harvey wrote in a note to clients, forecasting a 10% drop for the S&P 500 Index by summertime. “Ultimately, the bend-but-not-break market mentality finally fails investors in 2022.” The U.S. equity benchmark is trading near a record high, after delivering a blockbuster 27% rally last year. With the Federal Reserve preparing to hit the brakes on support measures, and fears rising that economic recovery may have reached its peak, strategists from Goldman Sachs Group Inc. to BlackRock’s Investment Institute expect returns to be more muted this year, while JPMorgan Chase & Co. warned this week that the U.S. market “could stall” if the outperformance of technology stocks starts to wane
• China needs larger cuts in taxes and fees in order to ensure steady economic growth in the first quarter amid fresh downward pressures, said Premier Li Keqiang, urging more support for the most fragile parts of the economy. On top of extending tax cuts that have expired, China must deepen the cuts, with more deductions for research and development spending, and special support for the service sector and other areas that have been heavily impacted by the pandemic, China National Radio cited Li as saying at a special meeting on the issue.  The call for greater cuts comes as as the government seeks to encourage household spending as part of efforts to stimulate economic growth. Personal income tax breaks worth around 110 billion yuan ($17.3 billion) have been extended, according to a State Council statement last week.

Happy New Year from the MacNicol Team!

*All sources from Bloomberg unless otherwise specified