July 14, 2022

Daily Market Commentary

Canadian Headlines

• Canadian stocks pared earlier losses after the market dipped to its lowest point since March 2021 on the Bank of Canada’s largest interest-rate hike since 1998. The S&P/TSX Composite Index ended the session 0.3% lower, rebounding from a 1.6% intraday drop after the central bank lifted interest rates by 100 basis points on Wednesday, a surprise move as economists expected a 75 basis-point hike. Governor Tiff Macklemboosted the central bank’s policy rate to 2.5% in an attempt to quell four-decade high inflation.  Bank of Canada’s supersized rate increase sets the stage for the Federal Reserve to continue on its aggressive interest rate path this month after a hotter-than-expected inflation report in the US on Wednesday. The S&P 500 Index dropped 0.5%. Banks and insurers drove the selloff as the S&P/TSX Financials Sector Index tumbled as much as 2.4%, the most in one month, before closing down 1.2%. While rising rates tend to bolster banks’ net interest margins, concerns over a potential recession and pressure on mortgages and other loans have weighed on lenders. Consumer staples and materials stocks were the only gainers in a sea of green and investors piled into the recession proof.
• Deutsche Telekom AG agreed to sell a majority stake in its towers unit in a deal that values the business at 17.5 billion euros ($17.5 billion), one of the largest digital infrastructure deals this year. Investors Brookfield Asset Management Inc. and DigitalBridge Group Inc. acquired the 51% stake in Deutsche Telekom’s German and Austrian business, GD Towers, for 10.7 billion euros in cash, according to a statement on Thursday, confirming an earlier Bloomberg News report. The German telecom company will use the proceeds to lower debt levels and fund plans to gain majority control of T-Mobile US, a key growth driver for the company, it said. The sale of a stake in Deutsche Telekom’s tower business is set to rank as one of the largest European infrastructure deals this year, according to data compiled by Bloomberg.
• Bank of Canada Governor Tiff Macklem’s decision to deliver the biggest interest rate hike in a generation hasn’t sapped his optimism about the nation’s outlook. Though he surprised markets by cranking up the policy rate by a full percentage point to 2.5%, Macklem tried to fuse his hawkish language around inflation with a soft-landing forecast as the most likely outcome in Canada. Economists say that will be a challenging feat. It assumes that the tightening cycle will be short-lived with rates barely moving into restrictive territory, and that the combination of high inflation and a weak housing market doesn’t seriously derail consumer spending. The central bank still sees Canada’s economy growing by 1.8% next year and 2.4% in 2024 — a Goldilocks scenario. The rosy outlook comes with a big risk. A wrong call on economic growth would be another blow to the central bank’s credibility, which is already in question after repeated missteps in forecasting inflation.

World Headlines

• European stocks fell on Thursday as the second-quarter earnings season got underway amid concerns of a looming global recession and hawkish central banks. The Stoxx Europe 600 Index was down 1% by 12 p.m. in London. extending yesterday’s declines on hotter-than-expected US inflation data. The FTSE MIB Index underperformed, sinking 2.4% amid concerns that Mario Draghi’s government was at risk after the Five Star Movement was set to boycott a key aid package vote. With the consumer price data spurring bets of an even bigger rate hike from the Federal Reserve this month, corporate earnings will provide crucial signs of the resilience of profit margins to surging prices and tightening financial conditions. Among the early reporters, Ericsson’s quarterly earnings and margins missed estimates, sending its shares to the lowest since March 2020.
• US equity futures fell along with stocks in Europe and a dollar gauge rose to a record Thursday after high US inflation hardened expectations for more aggressive Federal Reserve monetary tightening that could trigger a recession. S&P 500 and Nasdaq 100 contracts retreated more than 1% each as the US second-quarter earnings season got underway. JPMorgan Chase & Co. plunged more than 5% in premarket trading after reporting results that missed analyst expectations. Treasury yields climbed, led by two-year maturities that are more sensitive to imminent Fed moves. The inversion between two-year and 10-year yields — a potential recession indicator — is the deepest since 2000. Traders have shifted toward expectations of an historic one percentage-point Fed interest-rate hike later this month after the US consumer-price gauge clocked a 9.1% annual climb. Fed Bank of Atlanta President Raphael Bostic said “everything is in play” to combat price pressures.
• Asian stocks declined, as markets in Singapore and the Philippines fell after surprise monetary tightening by the two Southeast Asian nations, while Chinese bank shares weighed amid a property crisis. The MSCI Asia Pacific Index dropped as much as 0.6%, with the financials gauge weighing the most on the measure. Ping An Insurance was the single biggest drag, leading a fall among Chinese lenders as home buyers in China refused to pay mortgages on delayed construction projects. Shares in Singapore and Manila declined after local monetary authorities unexpectedly tightened policy rates to tackle inflation. Their declines helped put a key Southeast Asian equities gauge on track for a bear market. Taiwan’s benchmark rose for a second day after a government support pledge, while Chinese tech firms also climbed.
• Brent oil retreated after a bumper US inflation print bolstered expectations that the Federal Reserve will make further aggressive interest rate hikes.  The global crude benchmark fell as much as 2.4%, touching its lowest level since March, while West Texas Intermediate also fell. Wider markets were softer on Thursday, while the dollar resumed its advance, weakening commodities priced in the currency. Traders have shifted toward expectations of an historic one percentage-point Fed interest rate hike later this month.  Time spreads are signaling scarce supply, however and Goldman Sachs Group Inc. said the market is “screaming” tightness. The bank said a large selloff this week has been driven by low liquidity and technical factors, with Brent down more than 20% from its high in June.
• Gold dropped back toward an 11-month low as as investors again turned to the dollar as a haven asset amid expectations for more aggressive US monetary tightening. The metal slipped as much as 1.3%, after ending Wednesday up 0.6% in the wake of a searing inflation report from the US. Investors bet that the Fed is more likely than not to raise interest rates by 100 basis points when it meets later this month, a move that would boost the chances of the economy entering a recession. By Thursday, investors had digested the inflation news and again turned away from gold to the greenback as a hedge, according to David Lennox, a resources analyst at Fat Prophets.
• JPMorgan Chase & Co. temporarily suspended share buybacks and reported second-quarter results that fell short of analysts’ estimates, driving the stock lower. The buyback pause is needed to quickly meet higher capital requirements and “allow us maximum flexibility to best serve our customers, clients and community through a broad range of economic environments,” Chief Executive Officer Jamie Dimon said in a statement Thursday.  The results offer the first look at how Wall Street fared in a tumultuous three months characterized by changing outlooks on prospects for the economy. Dimon warned of an economic “hurricane” last month, citing the challenges the Federal Reserve faces as it tries to rein in inflation.
• KKR & Co. has agreed to acquire a minority stake in UK utility Northumbrian Water for 867 million pounds ($1 billion) from Hong Kong billionaire Li Ka-shing’s CK Group, the latest of a series of major deals announced by the conglomerate. After the transaction, KKR will hold a 25% interest in two Northumbrian Water units, while the rest of the utility will be held by subsidiaries of the group’s real estate and infrastructure arms, CK Asset Holdings Ltd.and CK Infrastructure Holdings Ltd., as well as a company linked to the group’s flagship CK Hutchison Holdings Ltd., according to a stock exchange filing on Thursday.  The deal is expected to generate a combined HK$1.4 billion ($178 million) for CK Asset and CK Infrastructure, which will use the proceeds as general working capital, according to the statement. CK Hutchison expects a gain attributable to shareholders of about HK$1 billion from its shareholding in the companies involved in the deal.
• Cryptocurrency lender Celsius Network Ltd. filed for Chapter 11 bankruptcy, the latest casualty of a $2 trillion crash that has wiped out some of the industry’s biggest names and exposed hundreds of thousands of individual investors to steep losses. Celsius, which has more than 100,000 creditors, said it took the step to stabilize its business and work out a restructuring for all stakeholders. The filing was made in the Southern District of New York and listed Alameda Research, the trading firm co-founded by crypto billionaire Sam Bankman-Fried, among major creditors. The company, one of the largest cryptocurrency lenders, had amassed more than $20 billion in assets by offering interest rates as high as 18% to depositors before it halted all withdrawals in June amid a panic run by clients. In its latest statement, Celsius said it has estimated assets and liabilities of anywhere between $1 billion and $10 billion.
• A group fighting antitrust legislation targeting the biggest US tech companies presents itself as a grassroots advocate for American taxpayers, yet it hasn’t disclosed a significant source of funding from one of the industry’s giants: Amazon.com Inc. The Competitiveness Coalition, led by Scott Brown, a former Republican senator from Massachusetts, has received more than $1 million from Amazon, according to three people familiar with the organization’s funding.  Founded in March as the bipartisan antitrust bill was gaining steam on Capitol Hill, the Competitiveness Coalition has held meetings with Republican lawmakers, run television ad campaigns and blasted out op-eds opposing the measure — all without revealing the backing from the e-commerce giant.
• Treasury Secretary Janet Yellen said Russian government officials had “no place” at the upcoming meetings for finance chiefs from the world’s leading economies in Bali, Indonesia. “Russia’s actions are not the actions of a government that upholds international norms and laws,” Yellen told reporters on Thursday when discussing Russia’s war in Ukraine. “Representatives of the Putin regime have no place at this forum.” Yellen continued to talk up a plan to cap the price of Russian oil exports, saying she hoped India and China will see how it would serve their own interests. Still, she said the proposal would work without those two nations through a ban imposed by the US, UK and European Union on the insurance of tankers carrying Russian oil.
• California is the prime example of a housing market gone awry. Decades of underbuilding led to soaring prices and the biggest deficit of homes in the US. But in the years before the pandemic, the crisis largely plateaued in the Golden State while it accelerated elsewhere, according to research released Thursday by  Up for Growth, a network of industry groups, academics, public officials, environmental and racial-justice organizations working to solve the US housing shortage. In Texas, the deficit rose nearly threefold from 2012 and 2019, to 322,000 homes. In Arizona and Georgia, which had little in the way of a housing shortage a decade ago, it surged 14 and 27 times, respectively. All together, the US needed almost 3.8 million homes in 2019, according to the analysis.
• Negotiations over unblocking millions of tons of Ukraine’s grain exports were constructive, according to Ukraine, the United Nations, Turkey and Russia, an initial step in bolstering global food supplies and aiding the country’s beleaguered farm sector. The talks were held in Turkey Wednesday with representatives from the countries and the UN. The sides — who agreed on the “main technical principles,” including setting up a monitoring unit in Istanbul — are expected to meet again next week, Turkey’s defense minister said in a statement. Ukrainian President Volodymyr Zelenskiy said in his daily address to the nation on Wednesday that the country’s delegation had reported some progress, with Ukraine expected to agree on details with the UN “in coming days.”  Russian Foreign Ministry spokeswoman Maria Zakharova said Thursday that some elements of possible agreements had been defined, according to Interfax.
• Amazon.com Inc. moved a step closer to possibly settling two European Union antitrust probes into how the U.S. ecommerce giant uses rivals’ sales data and whether it unfairly favors its own products, after proposing remedies to appease EU concerns. The European Commission said on Thursday that it’s asking rivals for their feedback on a proposed deal in two antitrust probes looking into Amazon’s use of non-public data from sellers on its marketplace and “a possible bias” in granting sellers access to its Buy Box and its Prime program. An EU agreement would take some of the heat off Amazon as national watchdogs in Europe start to ramp up their antitrust scrutiny of the US giant. Germany’s Federal Cartel Office this month said Amazon should be subject to tough new antitrust rules due to its market dominance and Britain’s competition regulator said it’s probing whether Amazon is abusing its dominance in its UK Marketplace.
• Italy’s Five Star Movement will refuse to back Mario Draghi’s government in a confidence vote on Thursday, raising the prospect that the prime minister could offer to resign in a move triggering political turmoil. Giuseppe Conte told lawmakers late Wednesday that his Five Star party, the second-biggest group in Draghi’s coalition, would boycott the Senate vote, which the government will call over an aid package. Draghi signaled that he would resign if Conte walked out on the ballot. Investors rushed to offload holdings of Italian debt, pushing the 10-year yield higher by as much as 24 basis points to 3.39%. This widened its premium over German peers — a closely watch gauge of risk in the region — to as far as 214 basis points, the most in a month.
• BYD Co., the Chinese automaker in the news over speculation Warren Buffett’s company may be selling its holding, said preliminary net income for the first half would be between 2.8 billion yuan ($415 million) to 3.6 billion yuan. The estimate is an increase of as much as 207% on the previous corresponding period, according to an exchange filing Thursday. BYD, which didn’t release preliminary figures this time last year, is due to report second-quarter earnings Aug. 15. Strong momentum of growth in new-energy vehicle sales and BYD’s leading market share have helped to offset pressure from upstream raw material price rises, the company said.
• Japanese Prime Minister Fumio Kishida said he asked for as many as nine nuclear reactors to be online this winter to help with an expected power crunch.  “There are concerns about a power shortage this winter,” Kishida told a news conference Thursday. “We must prevent this situation.” The Ministry of Economy, Trade and Industry will do what they can to push for nine reactors operating in winter, which can cover roughly 10% of Japan’s power consumption, said Kishida. That falls in line with plans from regional utilities, which aim to have that many reactors producing electricity when colder weather hits.
• The three-month London interbank offered rate for dollars notched its biggest increase since 2008, soaring to the highest level in more than three years as traders anticipate larger interest-rate hikes by the Federal Reserve. Libor rose for the fourth straight session, jumping almost 23 basis points to 2.7403%, in the largest one-day increase since September 2008. The spread of Libor over overnight index swaps widened after inverting the previous session.
• Tesla Inc.’s top artificial intelligence executive and a key figure behind its driver-assistance system Autopilot is leaving the electric-car maker after a months-long sabbatical. Andrej Karpathy, who joined Tesla in 2017, announced his departure in a series of tweets Wednesday. He was senior director of AI and led the Autopilot computer-vision team that’s tried for years to render the company’s cars capable of driving autonomously. “It’s been a great pleasure to help Tesla towards its goals over the last five years and a difficult decision to part ways,” Karpathy wrote. “In that time, Autopilot graduated from lane keeping to city streets and I look forward to seeing the exceptionally strong Autopilot team continue that momentum.”
• Former President Donald Trump is returning to Washington eighteen months after leaving office, at the same time a House committee continues to meet to investigate his role in the Capitol insurrection, two people familiar with his plans said.  Trump is scheduled to speak later this month at a two-day “America First Agenda Summit” hosted by the America First Policy Institute, a non-profit think tank formed last year by former cabinet members and top officials in his administration to create platforms based on his policies. The summit starts July 25 with a keynote luncheon with former Speaker of the House Newt Gingrich and speakers on energy, the economy, immigration and other issues including former Trump economic adviser Larry Kudlow, former Energy Secretary Rick Perryand former coach Lou Holtz.
• Manhattan apartment rents reached another record high in June, with even more pain to come for prospective tenants as the market heads into its most competitive season. New leases were signed last month at a median of $4,050, according to appraiser Miller Samuel Inc. and brokerage Douglas Elliman Real Estate, which have tracked the data for more than three decades. That topped the previous record, set in May, by $50 and was nearly 25% more than a year earlier, just as the rental market began to emerge from its early-pandemic slump. Average rents, a figure that’s more skewed by the most-expensive deals, topped $5,000 for the first time, the firms said.
• Argentines face the prospect of 90% inflation by year end after the economy minister’s exit triggered overnight price rises and the central bank comes under pressure to let the peso depreciate more rapidly.  That would be the fastest pace since hyperinflation three decades ago, and the highest rate in the world outside Venezuela and Sudan, according to forecasts from the International Monetary Fund.   The dramatic exit of former Economy Minister Martin Guzman this month led to price mark-ups by many businesses. Some Argentines raced to the shops the morning after Guzman quit, to try to stock up ahead of peso devaluation and price hikes.
• Emirates rejected demands by London Heathrow airport to cut capacity and said it will operate its flights as planned, days after the hub said it would ask airlines to stop selling tickets for the busy summer season and limit daily passenger numbers. The carrier, which operates six daily Airbus SE A380 superjumbo jets to Heathrow from its base in Dubai, said the airport operator gave it just 36 hours notice to limit passenger capacity and it was impossible to rebook travelers onto other flights as its services were full for the next weeks. Heathrow imposed an unprecedented two-month cap on passenger traffic to contain flight chaos, asking carriers to limit departing people to 100,000 through Sept. 11. The hub said the curbs were needed because new recruits were not “up to full speed” while  some key functions, like ground handlers for baggage, remain significantly under-resourced.

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

*All sources from Bloomberg unless otherwise specified