July 15, 2022

Daily Market Commentary

Canadian Headlines

• Canadian bank stocks slid the most in more than two years as the first round of earnings from US lenders weighed on the outlook for the financial sector amid growing fears of a recession. The S&P/TSX Composite Commercial Banks Index, which tracks Canada’s eight largest lenders, dropped 3.8% Thursday, the biggest drop since June 2020, after JPMorgan Chase & Co. and Morgan Stanley posted results that pointed to deteriorating prospects for the world’s largest economy. Royal Bank of Canada, the nation’s largest lender, sank 5.6%, the most since March 2020 when the pandemic devastated markets. It has plunged 20% since its record high in January. Bank of Nova Scotia and Toronto-Dominion Bank slumped as much as 3% and 2.1% respectively. Canadian lenders are due to report earnings next month.
• Turquoise Hill Raises 2022 Gold Production Guidance. Copper production guidance for 2022 remains within the range of 110,000 to 150,000 metric tons while 2022 gold production guidance has been revised from a range of 135,000 – 165,000 ounces to 150,000 – 170,000 ounces. Expenditures on property, plant and equipment for 2022 are now expected to be approximately $140 million to $170 million for open-pit operations due to further schedule changes impacting the timing of spend and lower deferred stripping as a result of mine plan changes resulting in a higher proportion of ore mining compared to waste removal. Total Operating Cash Costs for 2022 are now expected to be in the range of $850 million to $925 million compared to original guidance of $800 million to $875 million due to higher royalties and price inflation for key raw materials, especially fuel and the lower deferred stripping.

World Headlines

• Asian stocks fell as weaker-than-expected China growth data weighed on sentiment and renewed fears of a crackdown battered the nation’s internet names. The MSCI Asia Pacific Index fell as much as 0.6%, on track for a weekly decline. Alibaba dragged down the Asian benchmark and the Hang Seng Tech Index following a report that said some company executives were summoned for talks by authorities in Shanghai in connection with the theft of a vast police database. Stocks in China led regional losses after data showed the economy grew 0.4% in the second quarter, the slowest pace since the country was first hit by the coronavirus outbreak two years ago. Chinese bank stocks fell further Friday, as a widening boycott on mortgage payments by homebuyers heightens concerns about a buildup in bad debt.
• European stocks rebounded after Thursday’s slump as traders pared their bets on Federal Reserve interest rate increases and after Italy’s president rejected an offer from Mario Draghi to resign as prime minister. The Stoxx Europe 600 Index rose 1.0% by 9:52 a.m. in London, with the auto and energy sectors gaining the most. The benchmark has dropped 1.5% this week after a hot inflation print and disappointing bank earnings in the US, and as political turmoil in Italy weighed on the market.
• US equity-index futures fluctuated and the dollar’s surge stalled at the end of a week in which markets have been whipsawed by shifting expectations for monetary tightening by the Federal Reserve and worries over global economic growth. S&P 500 and Nasdaq 100 contracts signaled a soft open for US stocks after Wall Street closed with a small drop as investors dialed back expectations of how aggressively the Fed will hike interest rates to combat inflation. Traders are awaiting earnings from CitiGroup Inc. and Wells Fargo & Co. Friday after disappointing results yesterday from JPMorgan Chase & Co. and Morgan Stanley.
• Treasury yields were drifting south on Friday as investors awaited a slew of economic data, including retail sales and inflation expectations from the University of Michigan sentiment survey. Markets are now pricing in a 47.5% probability that the Fed will raise its benchmark interest rate by 100 basis points to a range of 2.5% to 2.75% at its July 26-27 meeting. Investors have been grappling with concerns Fed monetary tightening could push the U.S. economy into recession, with the 2-year/10-year spread remaining below zero.
• Oil is poised to end the week below $100 a barrel for the first time since early April after another volatile period of trading marked by escalating concerns over an economic slowdown. West Texas Intermediate tumbled below $91 a barrel on Thursday, erasing all of the gains seen in the wake of Russia’s invasion of Ukraine in late February, before clawing back some of those losses. Futures edged higher on Friday, but the US benchmark is still down around 8% for the week.
• Gold is heading for its fifth weekly loss, the longest streak of such declines in almost four years, with its haven credentials sidelined by investors becoming super-bullish on the US dollar. Bullion has come under relentless pressure in the past month as investors turn to the greenback in the face of an increasingly hawkish Federal Reserve. That trade got another boost this week from soaring US inflation. Gold slumped below $1,700 an ounce on Thursday for the first time in almost a year, while Bloomberg’s dollar gauge climbed to a record.
• Copper tumbled to a 20-month low as fears of a global recession hurt the demand outlook for the metal seen as an economic bellwether due to its wide range of uses. The commodity, used in used in everything from power cables to electric motors, dropped as much as 3% to sink below $7,000 a ton. Prices are down 35% from a record high set just four months ago when investors worried that Russia’s invasion of Ukraine could disrupt supplies in an already tight market. Now the focus has switched to demand concerns and the threats are stacking up. China — which accounts for half of all copper consumption — is struggling with the effects of Covid lockdowns, while Europe is battling an energy crisis. That’s happening as central banks around the world raise interest rates to fight soaring inflation. Copper was down 2.7% at $6,980 a ton by 9:43 a.m. on the London Metal Exchange. It has fallen 28% this year, heading for the biggest annual drop since 2008, the height of the financial crisis. The decline is part of a broader selloff in industrial metals, most of which also retreated on Friday.
• Iron ore stayed below $100 a ton after sinking Thursday, with the steep drop triggered by long-term pressures on China’s steel industry and home buyers boycotting mortgage payments, roiling the property market. Futures fell almost 8% in Singapore Thursday to the lowest since November, and dipped further Friday. Iron ore has lost more than half its value since peaking at $227 a ton in May last year, as the world’s largest steelmaker grapples with virus lockdowns and a rout in home sales that has lasted close to a year. Until Thursday, China’s prolific and persistent stimulus plans to shore up the beleaguered construction industry had helped keep iron ore prices above $100 a ton. But they tumbled amid reports that disgruntled home buyers are rebelling against loan payments on unfinished projects. Iron ore futures in Singapore fell as much as 4% to $96.20 a ton on Friday before trading at $97.20 by 3:20 p.m. local time. Prices have fallen more than 14% this week. Futures in Dalian plunged 7.3%, after a 5% drop on Thursday, while steel contracts in Shanghai dropped further to their lowest levels since the second half of 2020.
• President Joe Biden will leave the Middle East this week with no public announcements on increasing oil supply, people familiar with the matter said. Biden heads to Saudi Arabia from Israel later on Friday, where he’ll meet with King Salman bin Abdulaziz and his son, Crown Prince Mohammed Bin Salman, the nation’s de-facto ruler. He will meet other leaders from the oil-exporting Persian Gulf on Saturday. Officials from the US and Saudi governments have been in close contact on the issue of energy markets, and discussions will continue regarding output from members of the OPEC+ cartel, one of the people said, asking not to be named because the discussions aren’t public. It’s not clear if any side agreements will be struck that won’t be announced.
• China’s economy grew at the slowest pace since the country was first hit by the coronavirus outbreak two years ago, making Beijing’s growth target for the year increasingly unattainable as economists downgrade their forecasts further. The 0.4% expansion in gross domestic product reported for the three months to June, when dozens of cities including Shanghai and Changchun imposed lockdowns, was the second weakest ever recorded. Goldman Sachs Group Inc. promptly cut its full-year growth forecast to 3.3%, saying the figures suggest Covid lockdowns last quarter took a heavier-than-expected toll on the economy. The slowdown means Beijing will miss its GDP target of about 5.5% by a wide margin this year, the first time that’s likely to happen. The government didn’t set a target in 2020, during the first wave of the coronavirus outbreak, and only missed it slightly by 0.2 percentage point in 1998.
• June’s retail-sales growth will be almost entirely driven by a spike in gasoline prices, as inflation takes a bite out of other goods purchases. Consumers also may have avoided some discretionary shopping around the Juneteenth long weekend, vacationing and boosting service sales instead — which are largely not included in the retail data. That means that the current rotation away from durable-goods purchases — where weakness is often a harbinger of recession, as such purchases can be postponed during hard times — may not be a good indication of underlying demand this time.
• A busy week of economic data concludes with June retail sales data, expected to rise 0.9% following a 0.3% decline in the prior month, along with import prices and the Empire state manufacturing index, all at 8:30 a.m. Eastern Time. Industrial production will be released at 9:15 a.m. Eastern, followed by the University of Michigan consumer sentiment index and 5-year inflation expectations at 10 a.m. Eastern. Federal Reserve Chairman Jerome Powell has shown keen interest in the latter. Wholesale prices on Thursday triggered fresh inflation concerns, though remarks by Fed Gov. Christopher Waller prompted traders to pull back on the idea of a 100 basis points interest rate hike in two weeks.
• Regulators are poised to extract about $1 billion in fines from the five biggest US investment banks for failing to monitor employees using unauthorized messaging apps. Morgan Stanley disclosed on Thursday that it expects to pay a $200 million fine, the same amount JPMorgan Chase & Co. paid as authorities use that settlement as a yardstick for the industry. Citigroup Inc., Goldman Sachs Group Inc. and Bank of America Corp. also have had advanced discussions with the regulators to each pay a similar figure, according to people with knowledge of the talks who asked not to be identified because the matter isn’t public. The discussions have not yet concluded and the penalties could still change. The grand total represents a rare escalation from regulators looking into such an issue, with fines tending to be significantly lower in the past. The sweeping civil probes rank among the largest-ever penalties levied against US banks for record-keeping lapses, dwarfing a $15 million penalty imposed on Morgan Stanley in 2006 over its failure to preserve emails.
• BlackRock Inc. clients slowed the amount of money they poured into the firm’s core investment funds as markets cratered and inflation surged. Net inflows into those products, called long-term funds, totaled $69 billion for the three months ended June 30, $40 billion less than analysts expected. In the first quarter, that figure was $114 billion. Total net flows, including cash-management accounts, were $90 billion, New York-based BlackRock said Friday in a statement. BlackRock’s assets under management, which crossed the $10 trillion threshold for the first time toward the end of last year, have come tumbling back down. They totaled $8.5 trillion at June 30, the lowest in almost two years. Adjusted earnings per share were $7.36, missing the $7.90 average estimate of analysts surveyed by Bloomberg.
• Wells Fargo & Co. missed analysts’ earnings estimates as home lending slowed and the bank set aside more than expected for potentially soured loans as the Federal Reserve’s rate hikes started to cool the once-hot housing market. The lender reported a $580 million loan-loss provision, according to a statement Friday, while analysts had expected $414.7 million. That marks a turnaround from last year when a $1.26 billion release of provisions padded results, and brought second-quarter net income to $3.12 billion, below the $3.19 billion analysts had expected. Mortgage-banking income fell 79% to $287 million as rates surged in the quarter, slowing what had been a soaring housing market. That missed analysts’ $392.4 million estimate. Wells Fargo is among firms that have been laying off and reassigning staff in that division. Chief Financial Officer Mike Santomassimo warned in June that the unit’s income could fall by half in the second quarter from the first — and it indeed fell 59% in that period.  Shares of San Francisco-based Wells Fargo, which fell 19% this year through Thursday, dropped 3.4% to $37.42 at 6.54 a.m. in early trading in New York.
• Pinterest Inc. shares jumped more than 15% in premarket trading after the Wall Street Journal reported that activist investor Elliott Management has acquired a stake in the struggling social-media company. Elliott has built a stake of more than 9%, making it the company’s biggest investor, the newspaper reported Thursday, citing unidentified people familiar with the matter. The shareholder has engaged in discussions with Pinterest management, though the nature of those talks wasn’t clear, the Journal said. The news follows a shake-up at Pinterest last month, when co-founder and Chief Executive Officer Ben Silbermann handed the reins to Google and PayPal Inc. veteran Bill Ready. The San Francisco-based company, which lets users create virtual scrapbooks, has been trying to expand further into e-commerce.
• Volkswagen AG’s newly formed battery business is working to overcome supply-chain headwinds as it ramps up production and prepares for an initial public offering. PowerCo, which bundles the carmaker’s global battery efforts, is trying to secure raw materials amid surging prices and logistics issues, according to the unit’s Chief Financial Officer Kai Alexander Mueller. VW plans to partner with Umicore SA to source cathode materials, is exploring working with Robert Bosch GmbH for machinery and agreed to offtake battery-grade lithium hydroxide from miner Vulcan Energy Resources. PowerCo, which broke ground on its first European factory last week, is expected to invest more than 20 billion euros ($20 billion) in five of its own cell factories by 2030. VW is building a sixth factory in Sweden via a partnership with Northvolt AB.

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

*All sources from Bloomberg unless otherwise specified