July 18, 2022

Daily Market Commentary

Canadian Headlines

• Suncor Energy Inc. reached a deal with activist investor Elliott Investment Management LP to appoint three new directors to the Canadian oil sands company’s board and review its retail business for a possible sale. The refreshed board will form a committee to conduct the review of the downstream assets, Suncor said Monday in a statement. The retail group includes more than 1,500 gas stations and store locations operating under the Petro-Canada brand.  The new board members  include former Talisman Energy executive Jackie Sheppard, ARC Financial partner Chris Seasons and former BHP executive Ian Ashby. Sheppard and Seasons will be part of the committee that will oversee the review of the retail business, along with director Russ Girling.
• Arcadis and IBI Group entered into an agreement on the recommended, all-cash offer of C$19.50 per share, or aggregate consideration of ~C$873 million, according to statement. Price represents a premium of ~30% to the IBI Group share price as of July 15 and 40% to IBI Group’s 30-day volume-weighted average price. Deal is unanimously supported by IBI Group’s board of directors and IBI Group’s largest shareholder, the IBI Group Management Partnership

World Headlines

• European stocks extended gains to their highest in more than a month as investors scaled back Federal Reserve rate hike bets, calming fears of a looming recession. The Stoxx Europe 600 advanced 1.4% by 10:03 a.m. in London to hit its highest level since June 13, with miners and energy sectors outperforming. The FTSE MIB rose 1.2%, underperforming other major indexes as traders braced for a fresh bout of political turmoil in the country, with Prime Minister Mario Draghi under mounting pressure to reverse his pledge to resign as soon as this week. Investors reversed bets on a full percentage-point move by the Fed after wary comments from officials including Atlanta Fed President Raphael Bostic and St. Louis’s James Bullard, plus a rare bit of good news on inflation. Meanwhile, investors are expecting the European Central Bank to increase rates by a quarter point when it meets on Thursday, marking its first rate hike in more than a decade.
• US equity futures rose, while the dollar weakened as investors scaled back bets on how aggressively the Federal Reserve will tighten policy, easing recession fears. Nasdaq 100 futures were up 1.2% and contracts on the S&P 500 added 1%. West Texas Intermediate crude traded near $100 a barrel while the Bloomberg Dollar Spot Index slipped 0.5%, extending a retreat from a record high. The S&P 500 index is more than 5% above June’s closing low following Friday’s strong rally on renewed hopes that inflation — and Fed rate hikes — may be close to peaking. Policy makers pushed back against even bigger hikes in interest rates and fresh data showed a greater decline in US consumers’ long-term inflation expectations. That boosted odds for a 75 basis points July Fed rate hike, squashing talk of a 100 basis-point move.
• Asian stocks climbed as investors dial back expectations of aggressive tightening by the Federal Reserve while weighing China’s policy support for the ailing property sector. The MSCI Asia Pacific Index rose as much as 1.4% Monday, poised for the first gain in three days, led by financial and technology shares. Hong Kong and South Korean equities were among the top gainers in the region, while the Japanese market was closed for a holiday. Chinese shares gained after central bank Governor Yi Gang said the monetary authority will step up efforts to provide stronger economic support amid the pandemic and external headwinds. Regulators also urged banks to support developers to help stabilize the real estate market, according to another report.
• Oil rose back near $100 a barrel, aided by a weaker dollar that put commodities broadly on a firmer footing. West Texas Intermediate added as much as 3.1%. European stock markets and US equity futures were higher on Monday. The dollar weakened — making commodities priced in the currency more attractive — as investors scaled back bets on how aggressively the Federal Reserve will tighten interest rates. Other raw materials including copper also gained. Last week President Biden concluded a trip to the Middle East and said he expects further oil supply increases from Saudi Arabia to help tame fuel costs. However, local ministers insisted that policy decisions would be taken according to market logic and within the OPEC+ coalition, a grouping that includes Russia.
• Gold rebounded from last week’s 11-month low, supported by a weakening dollar as traders pare back expectations of aggressive Federal Reserve interest-rate hikes. Prices bounced as much as 0.9% on Monday as the dollar declined for a second day, taking some of the strain off the non-interest bearing precious metal after the prospect of a super-sized rate hike helped spark a fifth straight week of losses. Federal Reserve officials are on track to raise rates by 75 basis points for the second consecutive month when they meet later in July, after policy makers pushed back against a bigger hike. Investors reversed bets on a full percentage-point move after wary comments from officials including Atlanta Fed President Raphael Bostic and St. Louis’s James Bullard, along with a drop in US consumer long-term inflation expectations, which eased some fears that price pressures are becoming entrenched.
• Goldman Sachs Group Inc.’s traders countered the industry’s dealmaking slump with revenue gains that raced past analysts’ estimates. The trading operation posted a 32% surge in second-quarter revenue that included another banner period for fixed income, which jumped 55%, the New York-based firm said Monday in a statement. The gains helped ward off the steep slowdown in investment banking as the volatility that spurred gains for its trading group weighed on the capital-markets and asset-management businesses.
• Investors added money to exchange-traded funds that buy emerging market stocks and bonds last week. This was the fourth straight week of inflows. Inflows to U.S.-listed emerging market ETFs that invest across developing nations as well as those that target specific countries totaled $182.3 million in the week ended July 15, compared with gains of $125.9 million in the previous week, according to data compiled by Bloomberg. So far this year, inflows have totalled $23.8 billion.
• Bank of America shares fluctuated in premarket trading Monday after the bank reported mixed second-quarter results. Shares initially fell before erasing losses to spike higher. They were trading little changed as of 7:11 a.m. in New York. The bank reported revenue of $22.79 billion compared to the average estimate for $22.86 billion and EPS of 73 cents versus forecasts of 75 cents. Still, the lender saw better-than-expected net interest income of $12.44 billion compared to the average analyst estimate of roughly $12.3 billion. Meanwhile, trading revenues were mixed with its fixed income business delivering a beat, while its equities division came in below expectations.
• Volkswagen AG’s Porsche sketched out plans to bolster profits in the next four years as the sports-car brand tries to win over investors for its initial public offering. Porsche targets an Ebitda margin of as much as 27% by 2026, the company said Monday. That would be below what Ferrari NV generated in 2021, but well ahead of Tesla Inc. and BMW AG. VW is planning to sell a minority stake in Porsche in the fourth quarter to help finance its push into electric cars and unlock value. The German company has hired more than a dozen banks to push the IPO, which could value Porsche at as much as 80 billion euros ($81.4 billion) to 90 billion euros, according to people familiar with the matter. VW has pitched the listing as a way for Porsche to gain greater autonomy in areas like software and partnerships while it can continue to benefit from a symbiotic relationship with the parent.
• For decades, US households bailed out the global economy when it needed a consumer of last resort. America’s latest spending spree has come with a sting in the tail. Stuck at home in the pandemic, people all over the world bought more goods—TV sets, laptops, and exercise bikes, to name a few—at the expense of services such as hotel rooms and gym memberships. The shift was significantly bigger in the US than in other rich countries. It’s been amplified by such retailers as Target Corp. and Walmart Inc., which piled even more stuff in their inventories than Americans wanted to buy. And since these goods are traded globally—with supplies constrained by Covid-19—US demand pushed up prices in other countries, too.
• A rally in stock markets may prove to be short-lived as inflation pressures remain high and a recession seems increasingly likely, according to strategists at Morgan Stanley and Goldman Sachs Group Inc. While the slump in equities since the beginning of the year reflects investor expectations of a contraction in growth, “I don’t think a deep recession is being priced yet,” said Peter Oppenheimer, chief global equity strategist at Goldman Sachs. “It’s premature to believe inflation is going to come down quickly or the pressure has eased for the Federal Reserve and other central banks to tighten,” he said on Bloomberg TV. For Morgan Stanley’s Michael J. Wilson, the odds of a US recession continue to increase, with the broker’s model showing a 36% probability in the next 12 months, while other warnings include rising jobless claims and falling job openings. “Counter-trend rally may continue, but make no mistake, we don’t believe this bear market is over, even if we avoid a recession,” he wrote in a note on Monday.
• Boeing Co. announced a firm order for 100 of its 737 Max 10 jetliners from Delta Air Lines Inc., its opening salvo at the Farnborough air show that the US planemaker hopes will provide a boost after it fell behind arch-rival Airbus SE. The purchase includes an option for 30 additional jets, the companies announced at the event on Monday. Should Delta convert the options into firm orders, the deal has a value of about $17.6 billion, though customers typically get steep discounts on large purchases. Delta’s commitment to the final and largest member of Boeing’s narrow-body jet family provides a much-needed respite for the US manufacturer. Airbus has grown its heft in the past decade to conquer close to 70% of the narrow-body segment, by far the most widely used aircraft category.
• US Treasury Secretary Janet Yellen called on “trusted” US allies to strengthen trade relationships to shore up global supply chains disrupted by the pandemic, worsened by Russia’s war in Ukraine and threatened longer term by a reliance on China. In her longest public address during a three-stop tour of East Asia, Yellen touted her “friend-shoring” concept as a way to reduce the vulnerabilities of a supply system badly strained over the past two years, and as a mechanism for reducing inflation in the US and elsewhere. “Friend-shoring is about deepening relationships and diversifying our supply chains with a greater number of trusted partners to lower risks for our economy and theirs,” Yellen said, according to excerpts of remarks she’s scheduled to deliver Tuesday at a research-and-development facility in Seoul run by South Korean conglomerate LG. “In so doing, we can help to insulate both American and Korean households from the price increases and disruptions caused by geopolitical and economic risks.”
• Russian Defense Minister Sergei Shoigu ordered part of his forces to focus on destroying Ukraine’s long-range missile and artillery systems during a visit to troops in occupied territory. Shoigu “instructed the commander to prioritize the defeat of long-range rocket and artillery weapons of the enemy with high-precision weapons” during a meeting with the military’s Vostok group, the Russian Defense Ministry said in a statement Monday. It wasn’t clear how much of a change this would represent since Russian troops have tried for months to destroy Ukrainian weapons in a “demilitarization” campaign that’s had mixed success as the US and its European allies step up supplies of equipment to help the government in Kyiv.
• Bank of America Corp. is expected to pay a $200 million fine related to a sweeping US probe into the use of unapproved personal devices, according to people familiar with the matter. The company will pay an amount in line with penalties that have been levied across Wall Street banks, said the people, who asked not to be identified because they weren’t authorized to speak publicly. The bank disclosed $425 million of expenses in its second-quarter results Monday related to “certain regulatory matters.” Last week, the bank said it was fined $225 million by regulators for unfair and deceptive practices related to a prepaid card program to distribute unemployment insurance and other public-benefit payments amid the pandemic.
• Gas giant Uniper SE applied to extend the 2 billion-euro ($2 billion) credit line it has drawn from German state-owned lender KfW Group, increasing the urgency for a government bailout. Uniper is running out of options as it has started drawing gas out of storage to sell to customers to avoid buying more expensive fuel in the spot market. The utility has asked the government for a bailout, including an equity stake and additional debt funding through an increase in a state-backed credit facility. Germany is under pressure to hammer out a deal soon. The inventory drawdowns, which started last week, are sapping supplies that are supposed to be saved for winter. Uniper first disclosed bailout talks with the German government at the end of June. Since then, discussions on how to finance a 9-billion euro bailout have been tense.
• The Bank of England’s struggle to restrain the fastest inflation in four decades drew fire from two lawmakers seeking to become the UK’s next prime minister, with Foreign Secretary Liz Trusshinting she may change the central bank’s mandate if she wins power. In Sunday’s televised debate of the five remaining Conservative Party lawmakers vying to succeed Boris Johnson, Truss said the UK is facing “unprecedented economic times” and that the “business as usual economic strategy” isn’t working.  She said the next government should look at other economies that had been successful in controlling inflation, citing the Bank of Japan which has faced repeated bouts of deflation in recent decades despite running the biggest quantitative easing program of all major central banks.
• Swedish retailer Hennes & Mauritz AB will start winding down its operations in Russia, having halted all sales in the country in March after Russia’s attack on Ukraine. The Stockholm-based company expects to book costs of 2 billion kronor ($190 million) from the process, of which about 1 billion kronor will have a cash-flow impact, it said in a statement. The group plans to reopen physical stores in Russia for a limited period of time to sell remaining inventory. “After careful consideration, we see it as impossible given the current situation to continue our business in Russia,” Chief Executive Officer Helena Helmersson said.
• Prime Minister Mario Draghi is under mounting pressure to reverse his pledge to resign as soon as this week and avoid throwing Italy into chaos as economic warning signs are building. The former European Central Bank chief will address lawmakers on July 20, when he’ll declare his intention to either give his fractious coalition another try or quit government. So far, he’s still determined to resign, according to people familiar with the matter. Matteo Renzi, the head of coalition party Italia Viva and a former prime minister, launched a petition for Draghi to stay over the weekend that got more than 70,000 supporters in a few hours. Business lobbies and local administrations joined the call for the prime minister to remain.
• Swire Pacific Ltd. is buying Coca-Cola Co.’s bottling operations in Vietnam and Cambodia for $1.015 billion, marking the Hong Kong conglomerate’s first expansion into the Southeast Asian beverages market.  The deal will give Swire access to “one of the most rapidly growing beverages markets,” said the company in a stock exchange filing on Monday.  Swire, whose business spans real estate and aviation in Hong Kong, has a long-standing relationship with Coca-Cola, and previously bought the beverage company’s bottling operations in southern China in 2016.
• China may allow homeowners to temporarily halt mortgage payments on stalled property projects without incurring penalties, people familiar with the matter said, as authorities race to prevent a crisis of confidence in the housing market from upending the world’s second-largest economy. Under a yet-to-be-finalized proposal from financial regulators, hundreds of thousands of buyers of stalled homes would be allowed to pause mortgage payments with no impact on their credit scores, the people said, asking not to be identified discussing a private matter. The plan is part of a broader push to stabilize the property market that includes urging local governments and banks to plug some of the funding shortages at developers, the people said. Authorities are ramping up efforts to backstop the real estate sector after mortgage payment boycotts snowballed in recent days, impacting at least 230 projects across 80 cities as of Friday. Total mortgages at stalled Chinese developments amount to 2 trillion yuan ($296 billion), according to analysts at GF Securities Co. and Deutsche Bank AG.
• Hulu has emerged as Walt Disney Co.’s fastest-growing U.S. streaming service, just as the company loads up on more adult-focused entertainment in a bid to expand its reach to a wider variety of viewers. New subscriptions to Hulu have outpaced those of Disney’s flagship streaming platform, Disney+, in 18 of the past 24 months, and total new subscriptions to Hulu have exceeded those to Disney+ in each of the last six quarters, according to data from subscriber-measurement firm Antenna. Hulu’s subscriber gains come as Disney leadership is under pressure from investors to keep up the momentum in Disney+ subscriber growth. Disney Chief Executive Bob Chapek has set a target of signing up between 230 million and 260 million Disney+ subscribers and achieving profitability for the streaming business by September 2024, a goal described as unrealistic by some shareholders.
• The days when investors had to shell out thousands of dollars to buy a single share of some of the world’s biggest technology companies are gone. Alphabet Inc. closes the door on that era Monday when its shares begin trading in the $100 range after completing a 20-for-1 split, following the blueprint laid out by Amazon.com Inc. In premarket trading, the stock rose 1.6% to $113.61.  The companies billed the moves as a way to make their stocks more accessible for retail investors and that has been achieved. But so far the lower price tags have done little to lift stocks amid broader concerns about Federal Reserve interest rate hikes and cooling economic growth.
• Coffee extended its rebound from the lowest since October in New York amid a weaker dollar and renewed concerns over supplies. Arabica futures jumped as much as 4.7%, after tumbling last week on the back of the dollar’s advance to a record high and worries over a global recession. The greenback eased for a second day on Monday and most soft-commodities contracts rose. There are still supply issues for coffee. Exchange-monitored stockpiles of arabica are at the lowest since 1999, while The Hightower Report said Friday that a La Nina weather event continues to cause output issues for major growers Brazil and Colombia.
• Moscow again rejected additional gas-pipeline space offered by Ukraine, keeping European buyers guessing as future flows on the key Nord Stream route also remain uncertain. At a monthly auction on Monday, Russia’s Gazprom PJSC opted not to book extra capacity to ship gas to Europe via Ukrainian pipelines in August. That keeps deliveries to the continent tight, just as concern grows that the Nord Stream link may not fully return when maintenance ends later this week. Russia’s squeeze on gas supplies has unsettled the market, with European benchmark futures more than doubling in value this year. Last week, Germany started to withdraw gas from stockpiles that it had been building up for winter, while Hungary declared an “energy state of emergency.”

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

*All sources from Bloomberg unless otherwise specified