July 12, 2022

Daily Market Commentary

Canadian Headlines

• Canadian equities dipped as investors sold risky stocks — cannabis, tech, and consumer discretionary — amid recession fears ahead of the Bank of Canada’s rate decision this week. This marks the second day of losses for the S&P/TSX index, which dropped 1.1%, or 206.06 to 18,816.80 in Toronto. The move was the biggest loss since June 30. Shopify Inc. contributed the most to the index decline, decreasing 8.9%. Canopy Growth Corp. had the largest drop, falling 11.5%.
• Software firm Dye & Durham Ltd. is weighing walking away from pursuing Australian data-services outfit Link Administration Holdings Ltd., according to people familiar with the matter, potentially ending a deal that was once worth C$3.2 billion ($2.5 billion). The Toronto-based firm may not table a new offer for the Australian pension fund management platform after its revised bids were rejected, according to the people, who asked not to be identified as the matter remained confidential. No final decision has been made and Dye & Durham could still proceed with its pursuit of Link, the people said. Representatives for Dye & Durham and Link declined to comment. Shares of Link slumped as much as 5.7% in their biggest decline in nearly four weeks after the Bloomberg News report, giving it a market value of about $1.3 billion.
• The network failure at Rogers Communications Inc.will be investigated by Canada’s telecommunications regulator, heaping more pressure on the company as its tries to gain approval of its acquisition of Shaw Communications Inc. Rogers Chief Executive Officer Tony Staffieri and other telecom executives met Monday with Canadian Industry Minister Francois-Philippe Champagne in the aftermath of a network collapse that shut down wireless and internet service for 12 million people. The problems, which began Friday, affected access to 911 emergency services, financial payment systems, government offices and even caused the postponement of events such as a concert by The Weeknd. Champagne said the Rogers network failure was “unacceptable” and that immediate steps were needed to fix reliability issues. The minister ordered companies including Rogers, BCE Inc. and Telus Corp. to reach agreements on emergency roaming and mutual assistance during outages and said there would be a probe of the events by the communications regulator, the Canadian Radio-television and Telecommunications Commission.
• The Bank of Canada is set to deliver a super-sized interest rate hike this week, as it accelerates efforts to withdraw stimulus from an overheated economy and rein in soaring inflation. Governor Tiff Macklem is expected to raise the central bank’s policy rate by three quarters of a percentage point on Wednesday, to 2.25% — the largest increase since 1998. That follows back-to-back half-percentage-point hikes in April and June, making the current tightening effort one of the most aggressive ever.  Though initially slow to respond to the cost-of-living crisis, Canada’s central bank is now scrambling to stamp consumer price gains down from a four-decade high and shore up public confidence that it’s serious about doing so — risking a recession in the process. Its biggest worry is that inflation becomes entrenched in wage and price expectations, making it increasingly difficult to bring under control.

World Headlines

• European stocks declined for a second day ahead of a key earnings season and amid concerns about new lockdowns in China, which could further weigh on global growth. The Stoxx Europe 600 fell 0.3% by 10:32 a.m. in London. Banks and technology stocks lagged while utilities outperformed. Traders are bracing for a challenging earnings season that will show how corporate profits are standing up to a flurry of challenges from surging inflation to supply constraints. Focus is also on a US consumer-price index reading due Wednesday, which will show whether Federal Reserve tightening has been successful at taming inflation or whether more needs to be done. The risk of a UK recession in the next 12 months is now almost 50-50, according to a Bloomberg survey that underscores the darkening outlook for the economy. The FTSE 100 was 0.2% lower on Tuesday.
• US equity futures fell Tuesday as the dollar and sovereign bonds rose, a pattern highlighting pervasive unease about the economic outlook amid high inflation and China’s struggles with Covid. The S&P 500 and Nasdaq 100 shed about 0.5% each after a Wall Street slide Monday, as traders brace for the second-quarter earnings season which may provide clues on how companies are weathering inflation and recession concerns. PepsiCo Inc., one of the first major industry players to report, rose in premarket trading after lifting its revenue forecast. The soft-drinks maker said demand remained robust despite inflation, though it expected headwinds from the strong dollar. The dollar pushed toward levels last seen at the height of the 2020 market panic over Covid and the yen strengthened, underlining investor caution.
• Asian stocks fell to a two-year low as China’s technology shares continued to face selling pressure amid regulatory jitters and a resurgence of Covid cases in the nation. The MSCI Asia Pacific Index slipped as much as 1.5%, dragged by tech and consumer discretionary shares. The Hang Seng Tech Index fell 11% from a June high to enter a technical correction as regulatory fines for the country’s tech giants continued to damp sentiment. Chinese benchmarks took a hit from renewed lockdown fears from a fresh virus outbreak in Shanghai. Japan and Taiwan were among the region’s worst performing markets on lingering concerns of a global economic slowdown. Market participants are hoping that key US inflation data due Wednesday and China’s GDP figures on Friday will provide clues on the global economy’s direction. Asia’s stock benchmark has slumped 20% this year amid worries about higher interest rates and the prospect of an economic downturn.
• Oil extended losses as a Covid-19 resurgence in China added to concerns about a global economic slowdown, with the International Energy Agency warning the worst of the energy crisis may be ahead. West Texas Intermediate lost as much as 2.9% to near $101 a barrel. Bearish sentiment has filtered through commodities as rising virus cases in China and a looming US inflation print stoke concerns about the demand outlook. A stronger dollar has added to the pressure, making oil less attractive to investors. Crude has tumbled since early June on escalating fears the US may be heading for a recession as central banks aggressively raise rates to combat inflation. Nations are experiencing the first global energy crisis and “we might not have seen the worst of it yet,” IEA Executive Director Fatih Birol said in Sydney.
• Gold steadied near the lowest in more than nine months as the dollar extended gains in the run-up to US inflation data this week that’s set to shape the magnitude of the Federal Reserve’s next rate hike. Investors concerned about the prospect of a global economic downturn have turned in droves to the greenback, which is already up more than 2% this month. That’s capped gold, despite support from an easing in US Treasury yields. Gold has ridden a roller-coaster this year as Russia’s invasion of Ukraine spurred a rally in the haven to well above $2,000 an ounce in March, only for the momentum to fade as the growth and inflation outlook shifted. In recent weeks, investors have cut holdings in bullion-backed exchange-traded funds.
• Iron ore prices sank to a seven-month low, with the demand outlook dimming on fears China may again impose strict Covid-19 curbs that hurt construction activity. Market watchers are monitoring the government’s response as the daily virus caseload in Shanghai grows, topping 50 for the fourth straight day. A more contagious sub-strain of the omicron variant has triggered additional mass testing amid the flareups, and close to 30 million people nationwide are under some form of movement restrictions. There’s concerns that more intense curbs could pile pressure on the still-struggling property sector, or complicate the roll-out of infrastructure stimulus. Dollar bonds of China’s real-estate developers plunged Tuesday. Futures for the steelmaking material have sunk from above $170 a ton in March, to not far off $100 a ton now because of weak demand in China. There’s now attention on whether steelmakers respond by reducing production, which would hurt iron ore consumption.
• OPEC’s first oil-market outlook for 2023 suggests no relief for squeezed consumers, with more crude needed from the group even though most members are already pumping flat out. The Organization of Petroleum Exporting Countries expects global oil demand growth to exceed the increase in supplies by 1 million barrels a day next year. To fill the gap, OPEC would need to significantly hike production, but members are already falling far behind the volumes needed right now due to underinvestment and political instability. Crude prices are holding above $100 a barrel as the world’s oil fields and refining facilities fail to keep pace with the post-pandemic rebound in fuel demand. That’s exacerbating a cost-of-living crisis and threatening to tip the global economy into recession.
• Peloton Interactive Inc. will stop building its bikes and treadmills at its own factories and rely solely on partners for manufacturing, marking one of the most dramatic steps yet to simplify its operations and reduce costs. The move is an about-face from Peloton’s strategy over the past three years, when it split manufacturing between its own facilities and partners. The company built a portion of its standard Bike models and the higher-end Bike+ using facilities it acquired in 2019 as part of buying Tonic Fitness Technology. It also relied on Taiwan-based manufacturing partner Rexon Industrial Corp. to build bikes and its Tread treadmill. Now, the company will cease operating its Tonic facilities and move all of its bike and treadmill manufacturing to Rexon, Chief Supply Chain Officer Andrew Rendich told Bloomberg News in an interview. “We are going back to nothing but partnered manufacturing,” he said. “It allows us to ramp up and ramp down based on capacity and demand.”
• The biggest U.S. banks are poised to report a double-digit increase in trading, the result of big market swings spurred by recession fears, soaring inflation and global turmoil, including Russia’s invasion of Ukraine. Trading revenue at the five biggest Wall Street firms likely climbed 16% to $27.8 billion in the second quarter, driven by fixed-income desks which are expected to have brought in a combined $16.4 billion, according to analyst estimates compiled by Bloomberg. That increase, along with higher net interest income tied to Federal Reserve rate hikes, should provide a boost to earnings, countering a hit from slowdowns in the companies’ investment-banking and mortgage businesses and a drop in valuations at their wealth-management arms.
• Russian President Vladimir Putin plans to visit Iran next week for talks with his counterpart Ebrahim Raisi and Turkish leader Recep Tayyip Erdogan, the Kremlin said. “The president’s trip to Tehran is being prepared” for July 19 and the three leaders will discuss the situation in Syria within the so-called Astana peace process, Kremlin spokesman Dmitry Peskov told reporters on a conference call Tuesday. “In addition to the trilateral meeting, of course, there will also be bilateral meetings.” This will be Putin’s first foreign trip outside republics of the former Soviet Union since he ordered Russia’s Feb. 24 invasion of Ukraine. He visited Tajikistan and Turkmenistan late last month. With the war now in its fifth month, the announcement came after US National Security Advisor Jake Sullivan warned Monday that Iran is preparing to send Moscow hundreds of drones, including ones capable of carrying weapons, and to train Russian troops to use them as soon as this month.
• European natural gas prices rose as much as 4.6% after Norway extended capacity reductions at several facilities that help bring the fuel to Europe. Shipments from the country are set to decline further on Tuesday, with reduced supplies to both the UK’s Easington and Belgium’s Zeebrugge terminals.  The curbs were caused by an incident at the Sleipner field, where impact is expected to last until Thursday, according to data from network operator Gassco. The outage has also affected the Kollsnes and Nyhamna processing plants in Norway, which have been hit by heavier reductions than what was announced on Monday.
• A private funeral was held Tuesday for former Prime Minister Shinzo Abe, whose assassination last week shocked a nation and brought renewed attention to his key policies such as bolstering the nation’s defenses. The funeral in Tokyo was for the family and associates of Abe, who was fatally shot at close range Friday by a gunman who approached from behind as the former premier was making an election campaign speech outside a train station in the western city of Nara. Larger-scale memorial services are to be held at a later date. Crowds of people lined the streets outside a Buddhist temple in Tokyo where the ceremony took place to pay their respects and view the hearse carrying Abe’s body — where his wife Akie sat in the front seat.
• On July 13, Joe Biden makes his first presidential visit to Israel. The country doesn’t see eye to eye with the US on a number of crucial foreign policy issues, such as the Biden administration’s attempts to revive the Iran nuclear deal or its tough stance on Russia over the war in Ukraine. But the trip could give Biden a chance to highlight real progress in another geopolitical arena: the US rivalry with China over advanced technologies. A long-running US effort to steer Israel’s tech industry away from China had yielded only patchy results, but now it seems to be working. Ties between Israel’s tech sector and China have eroded in recent years, threatening to cut off a key remaining option for Beijing to access strategically important technology. Despite its size, Israel is an essential focus for geopolitical maneuvering over tech. It’s a major hub for cybersecurity companies, many staffed by veterans of elite military intelligence units. About 40% of the private global investment in cybersecurity now takes place in Israel, according to the country’s National Cyber Directorate. Hundreds of foreign companies have also set up research and development centers in the country.
• Sinch AB shares plunged for a second day, erasing in total about $1.3 billion of market value, as the Swedish cloud-based platform provider warned that a “reassessment” of certain historical costs will hit second-quarter profit. The stock fell as much as 25% in Stockholm, extending a 28% drop on Monday which traders had attributed to a tweet on Sinch’s financial statements from an account called NingiResearch. The company said Tuesday that the reassessment of cost of goods sold for past periods will negatively affect second-quarter earnings by 162 million Swedish kronor ($15.3 million). It said it decided to issue a statement in light of “the unusually strong share price movement” on Monday, even though remaining parts of the results have not yet been finalized ahead of their July 21 release.
• Walmart Inc. agreed to order 4,500 electric vans from Canoo Inc., sending shares of the struggling startup soaring in early trading. The deal announced in a statement Tuesday is a boon to Canoo, which ended the first quarter with just $105 million in cash. The company recently moved its headquarters to Walmart’s hometown of Bentonville, Arkansas, and warned in May of substantial doubt about its ability to continue as a going concern. Canoo shares surged as much as 41% to $3.35 before the start of regular trading. The stock has plunged since the startup went public by merging with a special purpose acquisition company in late 2020.
• Nearly all industrial scale Bitcoin miners in Texas have shut off their machines as the companies brace for a heat wave that is expected to push the state’s power grid near its breaking point. Miners such as Riot Blockchain Inc., Argo Blockchain Plc and Core Scientific Inc., who operate millions of energy-intensive computers to secure the Bitcoin blockchain network and earn rewards in the token, flocked to the Lone Star State thanks to its low energy costs and liberal regulations on crypto mining. The state has become one of the largest crypto-mining hubs by computing power in the world. “There are over 1,000 megawatts worth of Bitcoin mining load that responded to ERCOTs conservation request by turning off their machines to conserve energy for the grid.” Lee Bratcher, president of Texas Blockchain Council told Bloomberg in an email response. “This represents nearly all industrial scale Bitcoin mining load in Texas and allows for over 1% of total grid capacity to be pushed back onto the grid for retail and commercial use.”
• More than two decades ago, Rich Glick contended with blackouts in California amid a severe drought, power plant outages, and market manipulation that squeezed electric utilities and became a political headache for him and his Energy Department colleagues. Years later, Glick blamed other government entities—including the Federal Energy Regulatory Commission, which he said didn’t do enough to keep consumer bills from skyrocketing. Now that he’s FERC’s chairman, Glick, 59, seeks to avoid a similar situation as he stares down a sweltering, stormy summer and awaits a Senate decision to extend his tenure.
• London Heathrow is imposing a two-month cap on daily passenger traffic, a dramatic response by the UK’s busiest airport to the flight chaos gripping Europe as airlines and ground crew struggle to process a surge in travel demand. The airport will limit daily passenger traffic to 100,000 departing people through Sept. 11, asking airlines to refrain from selling summer tickets, according to a release on Tuesday. Current forecasts are modeling for as many as 104,000 passengers a day over the summer, still below the roughly 125,000 passengers that left daily this time before the pandemic. The move comes in reaction to staffing that Heathrow said is not yet “up to full speed” as it rushed to replenish its workforce with new recruits. Some key functions, like ground handlers for baggage, remain significantly under-resourced, according to the airport. The hub has been particularly hard hit by the travel disruptions, as a surge in bookings during the busiest time of travel clashed with a mass exodus of workers during the pandemic.
• The US is planning a strategy to prioritize the Pacific Island countries in its foreign policy, seeking to align with concerns over climate change and development in a bid to counter China’s growing influence in the vast oceanic region. The White House gave few details on the new iniative Tuesday, saying it will come under the Indo-Pacific Strategy. Fiji in May joined the U.S. in a wide-ranging Indo-Pacific Economic Framework, making it the first Pacific Island nation to do so.  US Vice President Kamala Harris will announce this new commitment along plans to open more US embassies when she participates virtually in the Pacific Island Forum leaders meeting in Fiji this week, according to the White House. The meeting started on Monday.
• Treasury Secretary Janet Yellen, hours after meeting with her Japanese counterpart, signaled no willingness by the US to support a potential intervention into currency markets to halt the depreciation of the yen against the dollar. “In general, our view is that countries like Japan, the United States, the G-7 countries, should have market-determined exchange rates,” Yellen told reporters Tuesday in Tokyo. “Only in rare and exceptional circumstances is intervention warranted and we did not discuss intervention.” Yellen met earlier in the day with Finance Minister Shunichi Suzuki to discuss a range of topics. They issued a joint statement saying Russia’s invasion of Ukraine had raised exchange-rate volatility and pledging “to consult closely on exchange markets and cooperate as appropriate on currency issues.”
• Inflation continued to heat up in June, hitting a fresh pandemic peak that keeps the Federal Reserve geared for another big interest-rate hike later this month, economists project. The consumer price index probably increased 8.8% from a year earlier, marking the largest jump since 1981, according to the median forecast in a Bloomberg survey. Compared to May, the widely followed gauge is seen climbing 1.1%, marking the third month in the last four that inflation has advanced at least 1%. The acceleration is likely to reflect higher gasoline and elevated food costs. Prices at the nation’s gas pumps reached a high of more than $5 a gallon in mid-June and will add at least 0.5 percentage point to the headline CPI monthly advance, according to Bloomberg Economics ahead of Wednesday’s report.
• PepsiCo Inc. raised its outlook for the second time in as many quarters, saying it expects revenue to grow 10% this year as consumer demand remains resilient. The maker of Mountain Dew, Fritos and Quaker Oats had previously increased its revenue forecast in April, nudging it up to 8% from 6%. Profit and sales in the second quarter beat estimates, the company said in a statement Tuesday. The new guidance reflects “the strength and resilience of our categories and consumer demand trends,” according to the company. As one of the first major industry players to report second-quarter data, investors are closely watching PepsiCo for insights into how shoppers are behaving as persistent inflation stretches their ability to absorb price increases.

“Do what is right, not what is easy nor what is popular.” —Roy T. Bennett

*All sources from Bloomberg unless otherwise specified