July 10, 2023

Daily Market Commentary

Canadian Headlines

  • Canadian Prime Minister Justin Trudeau said his country will more than double the number of its troops in Latvia to help shore up NATO’s eastern flank against potential Russian aggression. The North Atlantic Treaty Organization member will deploy as many as 1,200 new personnel to boost the Canadian-led battle group in Latvia as it expands to a combat-capable brigade, Trudeau said at a military base in Adazi, Latvia, on Monday. He announced an investment of C$2.6 billion ($2 billion) in weapons, intelligence and in cyberactivity. Canada has led a multinational NATO battle group in Latvia for six years and currently has about 700 of its own soldiers there. The force is one of four NATO Enhanced Forward Presence battle groups in the region.

World Headlines

  • European stocks were steady as traders assessed inflation data from China which sparked speculation about potential economic stimulus, ahead of US figures that are likely to show prices are cooling. The Stoxx Europe 600 was little changed by 9:43 a.m. in London after the benchmark slumped most since March last week. Data showed China’s consumer inflation rate was flat in June while factory-gate prices fell further. Gains in energy as well as food and beverages shares outweighed losses in miners and retail. European equities have had a weak start to the second half as concerns about higher rates and slowing growth linger, with the chief economist of the Organization for Economic Cooperation and Development saying the European Central Bank faces a tough job deciding when to stop hiking. Traders are now looking to the earnings season to assess how companies have managed through headwinds such as higher interest rates and slowing Chinese demand. Inflation data from the US due on Wednesday will also be significant for markets.
  • US equity futures struggled for traction as soft Chinese price data fueled concern about the outlook for the global economy ahead of key American inflation reports later this week. Futures on the S&P 500 were little changed and those on the Nasdaq 100 slipped after most American equities dropped Friday when wage data showed inflation remains a threat. Treasury yields ticked lower and a gauge of the dollar gained. Equities have been on the back foot at the start of the second half amid concerns economies will buckle under high rates as central banks keep up the fight against rising prices. US Treasury Secretary Janet Yellen said at the weekend she wouldn’t rule out a US recession, noting inflation remains too high.
  • Asia’s key equity benchmark fluctuated as gains in Chinese technology stocks including Alibaba and Tencent helped counter concerns over prospects for further rate hikes by the Federal Reserve. The MSCI Asia-Pacific Index fell as much as 0.4% after erasing an earlier gain of as much as 0.5%. US jobs data last week tamped down speculation the Fed would leave interest rates unchanged later this month. Alibaba rose as much as 5.5% in Hong Kong, while Tencent also gained on signs that a regulatory crackdown on tech companies is over after China imposed fines of more than $1 billion. Key gauges in Hong Kong and on the mainland rose even after weaker-than-expected producer price data for June raised concerns over Chinese deflation and a lack of meaningful stimulus.
  • Oil dipped, eroding its biggest weekly gain since early April, as investors juggled signs of tightening supply and persistent macro-economic concerns. Brent futures traded near $78 a barrel having closed 4.8% higher last week following a pledge by Saudi Arabia and Russia to reduce supply. The market is flashing signs of strength and speculators have boosted their bullish bets for the global benchmark and West Texas Intermediate crude. Oil remains about 9% lower for the year due in part to China’s lackluster economic recovery and aggressive monetary tightening by central banks. A solid US employment report keeps the Federal Reserve on track to boost interest rates this month, maintaining headwinds for crude prices. The International Energy Agency and OPEC will provide snapshots of the market when they release monthly reports later this week.
  • Gold steadied as traders looked ahead to US price data that may shape the Federal Reserve’s next steps. The midweek US report is forecast to show the consumer price index rose 3.1% from a year ago, the smallest advance since March 2021, largely due to cheaper gasoline. However, most traders still expect the Fed to hike again later this month, potentially dulling the allure of non-interest-bearing bullion. Gold capped a back-to-back monthly loss in June as persistent US inflation pressures and commentary from central bank policy makers triggered bets that the Fed isn’t yet done with its tightening campaign. That’s helped to lift 10-year Treasury yields back above 4%, hurting bullion.
  • Investors withdrew money from exchange-traded funds that buy emerging market stocks and bonds last week, ending four weeks of inflow that reached $2.21 billion. Outflows from U.S.-listed emerging market ETFs that invest across developing nations as well as those that target specific countries totaled $6.33 million in the week ended July 7, compared with gains of $36.8 million in the previous week, according to data compiled by Bloomberg. So far this year, inflows have totalled $9.47 billion.
  • Treasury Secretary Janet Yellen’s two-day engagement with top officials in Beijing offered a way for the US and China to contain damage in their economies from the two nations’ intensifying rivalry. While on the military side, there’s been no resumption of bilateral communication — amid risky encounters between the two sides’ air and maritime forces — Yellen’s high-profile visit suggested hope for guardrails in economic competition. In 10 hours of meetings Friday and Saturday, Yellen said she sought to convince China’s newly installed economic team that the US isn’t bent on seeking “economic advantage” against the country. Though the Biden administration has ramped up controls on key exports and is considering curbs on American companies’ outbound investments, Yellen emphasized that the measures Washington takes are “targeted” and designed only to safeguard national security.
  • Joe Biden and Prime Minister Rishi Sunak agreed to hold a high-level meeting on UK-US economic relations and vowed to strengthen their alliance over Ukraine during a brief meeting in Downing Street. According to the British account of the talks, the meeting in October will be used to advance the Atlantic Declaration framework agreed by the two leaders in Washington last month. The two nations have begun work on a critical minerals agreement, according to the British readout, which said the men also discussed Indo-Pacific geopolitics and efforts to protect the Northern Ireland peace process. The US president held talks with the British premier before heading to Windsor Castle for a meeting with King Charles III. He’s then set to travel to Lithuania for the North Atlantic Treaty Organization’s summit, which starts Tuesday. Amanda Sloat, US National Security Council senior director for Europe, told reporters that Biden will “compare notes” with Sunak on their support for Ukraine and on its counter-offensive against Russia.
  • China will extend policies to support cash-strapped developers and shore up the ailing real estate sector, including allowing the postponement of loan repayments by a year. Financial institutions will be encouraged to negotiate with real estate firms to extend outstanding loans in order to spur the delivery of homes under construction, according to a joint statement from the People’s Bank of China and National Financial Regulatory Administration. Some outstanding loans including trust loans due before 2024 will be given a one-year repayment extension, it said. China’s two-year real estate crisis is stifling a recovery in the world’s second-largest economy, fueling expectations for the government to take more steps to revive demand. Home sales resumed declines in June following a brief rebound earlier this year, adding to pressure on debt-laden developers.
  • Russian President Vladimir Putin met with Wagner mercenary leader Yevgeny Prigozhin days after the failed uprising that he had denounced as treason, the Kremlin said. The extraordinary meeting adds another twist to the saga of the Wagner mutiny that spiraled into the most serious threat to Putin’s nearly quarter-century rule. The Kremlin leader had threatened “harsh” punishment over the June 24 rebellion, saying Wagner’s leaders “betrayed their country and their people” and brought Russia to the edge of civil war. Putin met Prigozhin and top Wagner commanders at the Kremlin for nearly three hours of talks on June 29, the president’s spokesman, Dmitry Peskov, said Monday, according to Russian news services. The commanders pledged loyalty to Putin as head of state and commander-in-chief and declared their readiness to continue fighting for Russia, Peskov said.
  • As Jack Ma’s clash with the Chinese government draws to a close after almost three years, it’s clear how costly the conflict has proven for his companies, Ant Group Co. and Alibaba Group Holding Ltd. Chinese authorities said on Friday they would wrap up a probe into Ant with the financial technology company paying a fine of almost $1 billion. The investigation began after Ma critiqued Beijing’s regulation of the financial sector in 2020, forcing Ant to pull the plug on what would have been the largest initial public offering in history. The costs go far beyond the latest fine. The crackdown has added to an erosion of confidence in the private sector in China as the country faces growing weakness in everything from consumer spending to the housing market, exports and infrastructure investment. Ant has had to overhaul its business model, pulling back from sensitive sectors and easing up on competition with state-backed banks. Its valuation, envisioned at about $315 billion after the IPO, has dropped to about $78.5 billion.
  • Among the lawyers, litigants and spectators who packed into a San Francisco courtroom last month for a hearing on the fate of the biggest video gaming deal ever was another breed altogether: the merger arbitrager. Portfolio managers and analysts from a handful of top investment firms, as well as specialized brokers who bet on whether mergers will go through, flew in from New York and Chicago. They were there to watch for signs — a grimace from the judge, a goof by a key witness — that the US Federal Trade Commission would succeed or fail in its bid to temporarily block Microsoft Corp.’s proposed $69 billion takeover of Activision Blizzard Inc. while the agency pursues an administrative challenge to it. “This trial is a key event in the arbitrage community,” Brian Lombardi, a New York-based broker at FBN Securities, said on the sidelines of the hearing. “Everyone wants to understand the outcome. If the preliminary injunction is granted, the deal is likely dead.”
  • Tucked away in hours of congressional testimony by Federal Reserve Chair Jerome Powell last month was an admission that the central bank was blindsided by the impact of shrinking its balance sheet four years ago. While Powell assured lawmakers the Fed is committed to avoiding a repeat of 2019 — when the repo market, a key part of US financial plumbing, seized up — Wall Street economists and strategists caution that quantitative tightening remains complex and hard to predict. Known as QT, it involves letting Fed bond holdings mature without replacement, draining cash from the financial system. In the coming months, the full brunt of the Fed’s current QT program is set to be felt. How it proceeds, and how the Fed handles the process, could shape its political latitude to keep using its balance sheet as a key tool in the future, amid Republican angst that was on display in Powell’s June 21-22 hearings