July 19, 2022

Daily Market Commentary

Canadian Headlines

  • (Reuters) – Private equity firm CVC Capital and wood panel manufacturer Kronospan have submitted a joint expression of interest to acquire Canadian lumber company West Fraser Timber Co, people familiar with the matter said on Tuesday.
  • Suncor Energy Inc.’s decision to bow to investor pressure and investigate a sale of its gas stations has turned the spotlight on one potential buyer — Quebec’s Alimentation Couche-Tard Inc. The acquisitive owner of the Circle K chain has been seeking a major acquisition and tried unsuccessfully to take over French grocery chain Carrefour SA last year. Suncor said Monday it will consider options for its downstream assets, which include more than 1,500 Petro-Canada locations, making it one of the country’s largest retail fuel and convenience store chains.
  • Shipments of Canadian oil to US refiners were thrown into disarray by a pipeline disruption just days after President Joe Biden’s unsuccessful bid to coax more crude out of Saudi Arabia. The force majeure declared by TC Energy Corp. on some crude flows through its massive Keystone pipeline prompted traders and refiners to bid up the price of a crucial grade of oil, potentially adding to already rampant energy inflation. The disruption triggered by a power outage at a pump station in South Dakota — where temperatures topped more than 100 Fahrenheit (38 Celsius), or 20 degrees above normal — came after Biden returned from a meeting with Saudi royalty without any pledges to immediately expand crude supplies.

World Headlines

  • European equities erased earlier declines to trade little changed as traders worried that the continent’s energy crisis will hamper economic growth and braced for the European Central Bank’s potentially bigger rate hike. The Stoxx Europe 600 Index was up less than 0.1% by 10:50 a.m. in London, having earlier dropped as much as 0.7%. Technology and financial services stocks led losses while health care, banks and utilities rose.  The risk that Russia will shut off supplies to the bloc in retaliation for multiple rounds of sanctions has weighed on European assets, adding to a flurry of this year’s investor concerns, including surging inflation, the war in Ukraine and hawkish monetary policy.
  • US equity futures advanced as investors assessed the outlook for corporate earnings and global growth amid Europe’s deepening energy crisis. The dollar fell against all its Group of 10 peers. Contracts on the Nasdaq 100 and S&P 500 climbed 0.9% after early-week gains unravelled Monday on Apple Inc.’s plans to slow hiring to brace for a potential economic downturn. Signs that high inflation and monetary tightening are squeezing consumers and employment could feed into worries that an equity revival since mid-June is merely brief. Corporate updates such as Apple’s are helping markets to calibrate the risk of recession. Netflix Inc., Johnson & Johnson and Lockheed Martin Corp. headline another busy day for earnings.
  • Asian stocks fluctuated on Tuesday as China’s policy efforts to resolve the mortgage boycott crisis failed to lift sentiment amid lingering woes in the sector and global growth concerns. The MSCI Asia Pacific Index erased a drop of as much as 0.4% to trade 0.1% higher as of 5 p.m. Hong Kong time. Technology shares were the biggest drags after a report on Apple Inc.’s plan to slow hiring highlighted growth risks. Industrial and financial shares gained. Hong Kong and Chinese equities were among the worst performers regionally, cutting short a rebound in the previous session. A gauge of developer shares fell despite a report that China may allow homeowners to temporarily halt mortgage payments on stalled projects, part of a broader policy push to stabilize the property market.
  • Oil held well above $100 a barrel after posting the biggest one-day advance since May, aided by a tightening market and a cooling in dollar gains. West Texas Intermediate dipped after rallying more than 5% on Monday. The dollar posted a third straight daily drop, making commodities priced in the currency more attractive, while a disruption along the Keystone pipeline cut shipments of some Canadian oil to US refiners. Oil markets have seen volatile trading in recent weeks as traders navigated concerns that a looming recession would hurt demand, the fallout from a stronger dollar, and signs that underlying physical conditions remain tight. Nearby Brent futures are trading in excess of $4.50 higher than the second month, a huge premium indicating that refiners are willing to pay up for barrels.
  • Gold held near an 11-month low as traders assess the outlook for further monetary policy tightening and the impact on global growth. Bullion hovered above the $1,700 an ounce level as it continued to be pressured by the strength of the US dollar, a sign of the prevailing caution in global markets. Still, a gauge of the greenback has retreated from a record hit last week. Investors are awaiting the Federal Reserve’s meeting on July 26-27 for a steer on how aggressive the central bank will be in raising interest rates to tackle searing inflation. The latest US data reinforce policy makers’ support for another 75-basis-point hike, according to Bloomberg Economics.
  • Halliburton Co. posted its biggest profit in almost four years as the growing isolation of oil powerhouse Russia spurs fracking in other crude-rich regions. The world’s biggest provider of hydraulic fracturing is almost sold out of gear in the North American market that includes the world’s most prolific shale fields, according to a statement Tuesday. The shares jumped as much as 4% in pre-market trading. Halliburton also recorded a $344 million pre-tax charge during the second quarter related to winding down its business in Russia amid international sanctions. The hired hands of the oil patch are reaping the windfall from sky-high energy prices after back-to-back oil busts prompted cost cutting and layoffs to cope with a global equipment surplus. Now, oilfield-service providers are focused on beefing up shareholder returns.
  • Netflix Inc.’s stock has looked cheap for months and yet buyers discovered to their dismay that it just kept getting cheaper. Now bulls say the video-streaming giant is on the verge of proving that it’s an actual value stock and not a value trap. The launch of a much-anticipated advertising supported service this year, plus a crackdown on password sharing, could help reverse the company’s shocking subscriber losses and provide a new revenue stream, the thinking goes. Investors will have to look past some more bumpy days: The company, which has more than 200 million subscribers, reports second-quarter results after the close Tuesday, and it’s already said it expects to have lost 2 million customers in the period, even with the huge success of the fourth season of sci-fi thriller “Stranger Things.”
  • JPMorgan Chase & Co.’s Morgan Health business, a successor to its failed joint venture with Amazon.com Inc. and Berkshire Hathaway Inc., is backing a health startup trying to slash workers’ out-of-pocket medical expenses. Morgan Health is investing $30 million in Centivo, a three-year-old Buffalo, New York-based health-plan administrator that says it’s holding members’ average annual out-of-pocket expenses to less than $350. That compares to a national average of about $800. Morgan Health is JPMorgan’s successor to Haven, a joint venture with Amazon and Berkshire Hathaway that disbanded after failing to produce meaningful change for the companies in health benefits. Morgan Health aims to develop better offerings for 150 million Americans who get coverage through employers, and Centivo offers an uncommon devotion to lowering costs, said Dan Mendelson, chief executive officer of Morgan Health.
  • International Business Machines Corp. lowered its forecasts for free cash flow this year due to the impact of a strong dollar and the loss of business in Russia, sending the shares down. The revision overshadowed results that topped analysts’ estimates, signaling that demand for mainframe computers, consulting and cloud services remains strong amid concerns of a pullback in tech spending. IBM said it estimates free cash flow of $10 billion this year, at the low end of a previous range of $10 billion to $10.5 billion. The reduced range isn’t a result of a broader business slowdown Chief Financial Officer Jim Kavanaugh said in an interview. “Our demand remains solid,” he said.
  • General Motors Co. will start selling a battery-powered Chevrolet Blazer next year, giving it a direct competitor to Tesla Inc.’s Model Y, the US’s best-selling electric SUV. The Blazer will go on sale in the summer of 2023, the automaker said Monday, quickly following the launch of the Chevy Silverado EV, with the $30,000 Equinox coming later in the year. The three vehicles will start GM’s long-awaited effort to establish the kind of lead in mass-market EV sales that the company has in internal combustion models. At the moment, the company’s newest EVs are pricey models from Hummer and Cadillac.
  • The leaders of Iran, Russia and Turkey are set to hold talks in Tehran on Tuesday, but the summit on enforcing a peace deal in Syria is likely to be overshadowed by President Vladimir Putin’s war in Ukraine. Putin and Turkish President Recep Tayyip Erdogan will “100%” discuss efforts to reach a deal on unblocking exports of millions of tons of Ukrainian grain from Black Sea ports, according to the Kremlin. The US has warned Iran is preparing to send Russia hundreds of drones, including ones capable of carrying weapons, amid significant losses by Putin’s military in Ukraine. The European Union, meanwhile, has proposed additional sanctions on Sberbank. Russia’s largest bank has already been cut off from the international payments system SWIFT, and now faces a total asset freeze.
  • The potential blockbuster deal of this year’s Farnborough air show still hangs in the balance, with Airbus SE growing more confident it can secure a landmark purchase of about 50 A350 wide-body jets from Air India Ltd. at the event, and Boeing Co. working on a deal for as many as 150 737 Max jetliners. The Indian carrier is considering Boeing’s narrow-body planes alongside the Airbus A350 jets, as part of a fleet renewal under new owner Tata Group, according to people familiar with the negotiations. Airbus’s long wait time for A320neo delivery slots may constrain its effort to come up with a rival offer for narrow-bodies, said the people, asking not to be identified discussing private deliberations. The discussions are ongoing and the final order tallies could shift, the people said. Airbus is trying to get the widebody deal firmed up at the show, but the carrier may wait with an official announcement until India’s Independence Day on Aug. 15, one person said.
  • The French government offered to pay about 9.7 billion euros ($9.9 billion) to fully nationalize Electricite de France SA as it seeks to resolve problems at the power generator that are exacerbating Europe’s energy crisis. The state will offer 12 euros a share to acquire the 16% of EDF it doesn’t already own, the French Finance Ministry said in a statement on Tuesday. That’s a premium of 53% to the closing value of 7.84 euros for EDF shares on July 5, the day before French Prime Minister Elisabeth Borne announced the nationalization. The offer will be submitted to Autorite des Marches Financiers by early September, with the aim of closing the process by mid-October, according to the Finance Ministry.
  • The European Union began membership talks with North Macedonia and Albania, pushing the two nations a step forward in a process held up for years as other Balkan countries advanced their accession bids. The announcement underscores the bloc’s efforts to alleviate doubts among countries in eastern Europe that it’s still willing to accept new members after years of slow progress, concerns that have only intensified since Russia attacked Ukraine. The invasion of Ukraine has raised concerns that Moscow may increase its influence in the Balkans, a region wrecked by wars in the 1990s where countries are clamoring for closer integration with the richer EU even as some continue to foster close ties with Russia. In a fast-track move last month, EU leaders advanced a decision to approve both Ukraine and Moldova as membership candidates.
  • The European Central Bank may consider raising interest rates on Thursday by double the quarter-point it outlined just last month because of the worsening inflation backdrop, according to people familiar with the situation. Such a move would mark a sharp deviation from guidance that the majority of Governing Council members have stuck to since it was laid out at the June 9 policy meeting and would bring the ECB more in line with the global drive for outsized hikes. The euro rose as much as 1.1% against the dollar to $1.0253, the highest since July 6 and less than a week after falling below parity for the first time in two decades. Money markets see an almost 50% probability of a half-point hike this week compared with 20% odds on Monday.
  • Temperatures in the UK soared to a record as a potentially deadly heat wave ramps up toward a peak later on Tuesday. The temperature in Charlwood, a village in the county of Surrey about 25 miles (40 kilometers) south of London, hit 39.1 degrees Celsius (102.38 degrees Fahrenheit), according to a provisional recording published by the UK’s Met Office. That breaks the previous record of 38.7°C set at the Cambridge Botanic Garden on July 25, 2019. The searing heat in the UK is disrupting train travel as the country’s normally temperate climate isn’t prepared to deal with extreme weather. As the use of fossil fuels continues to warm the planet, such heat will only get more common.
  • A persistent heatwave is hobbling China’s ability to keep its factories operating as virus curbs disrupt the supply of coal and inventories of the fuel run low. The government’s pledge to prevent a repeat of the power outages that crippled industry last year is being sorely tested by the summer heat. As the world’s biggest producer and consumer of coal, China is proving to be both a victim and a contributor to a climate emergency that has brought an extended bout of scorching weather across the globe.  The nation’s electricity generation hit a record high last week as demand for air-conditioning quickly depletes its stockpiles of coal, which at some coastal power plants have fallen to an alarming level of just 10 days’ usage, according to a note from consultant Fenwei Energy Information Service Co.
  • New Covid-19 cases in China jumped to almost 700, with more infectious strains of the virus continuing to test the country’s hardline approach as outbreaks spread beyond the major cities. China reported 699 cases for Monday — the highest daily tally since May 22 — after recording more than 1,000 infections over the weekend.  Most of the cases are centered in the hotspots of the Guangxi region in the south, which recorded 243 cases on Monday — taking its total since the outbreak there flared six days ago to 829 — and the remote northwestern province of Gansu, which reported 231 new infections, taking the number of cases there in the past week to 953.
  • Mining giant BHP Group has joined rival Rio Tinto Group in signaling more turbulence to come for commodities producers as costs balloon and demand for everything from iron ore to copper hits headwinds. The world’s biggest miner warned Tuesday of an “overall slowing of global growth” amid war in Ukraine, Europe’s energy crisis and global monetary tightening. The commentary —  from its latest quarterly output update — echoed remarks from Rio last week. BHP also said cost pressures would linger over the coming 12 months. While profitability is still strong, both miners “are trying to prepare the market in case we see a significant slowdown in Chinese demand,” Gavin Wendt, a senior resource analyst at MineLife Pty said by phone. “The tougher conditions are coming at a time when prices they’re receiving from commodities are easing, putting pressure on margins.”
  • NCR Corp. is in exclusive talks to be sold to private-equity firm Veritas Capital, according to people familiar with the matter, in what would be one of the biggest leveraged buyouts as the environment for such deals has become more perilous. A deal could still be weeks away, the people said, and it’s far from guaranteed, given that a number of LBOs have been shelved lately because of choppy financing markets. Should a deal get done, it would be one of a small number of relatively big LBOs to be sealed in recent months as rising interest rates boost the cost of deal financing. NCR has a market value of $4 billion.
  • Johnson & Johnson lowered its earnings and revenue forecast for the year, citing a strengthening dollar, even as it beat analysts’ estimates for second-quarter profit. Adjusted earnings for 2022 will be $10 to $10.10 a share, the New Brunswick, New Jersey-based health conglomerate said in a statement, down from an earlier range of $10.15 to $10.35 a share. J&J now sees full-year revenue of $93.3 billion to $94.3 billion, a reduction of $1.5 billion across the range. Adjusted earnings were $2.59 a share, beating Wall Street’s average expectation of $2.55, while sales met the average view of $24 billion.
  • Chinese authorities are preparing to impose a fine of more than $1 billion on ride-hailing giant Didi Global, bringing an end to a yearlong investigation into the company’s cybersecurity practices, according to people familiar with the issue. Once the penalty is announced, the government plans to ease an earlier restriction banning Didi from adding new users to its platform, and allow the Beijing-based technology company’s mobile apps to be restored to domestic app stores, some of the people said. The fine will also pave the way for Didi, whose app is used by tens of millions of users in China each month, to kick-start a new share listing in Hong Kong, these people said. The Cyberspace Administration of China didn’t immediately respond to written questions. The company didn’t immediately reply to requests for comment.
  • A judge will hear arguments on Twitter Inc.’s request to fast-track its lawsuit against billionaire Elon Musk, as the social-media platform seeks to force him to complete his proposed $44 billion acquisition.  Lawyers for San Francisco-based Twitter say they need only four days to prove the world’s richest person must honor his agreement and pay $54.20 a share. The company filed suit last week, requesting a Sept. 19 start for the non-jury trial.  Musk’s legal team said Twitter was unfairly pushing for a “warp speed” trial. The billionaire says Twitter violated the terms of the buyout deal by not turning over detailed information about so-called spam bot accounts within its system. The case requires a “forensic review and analysis of large swaths of data” about the bots along with other legal issues, Musk’s lawyers said in a filing, seeking a February trial date.
  • A rally in cryptocurrencies Tuesday took Bitcoincloser to breaking out of a one-month-old trading range and ignited big jumps in smaller tokens commonly referred to as altcoins. The largest virtual coin climbed as much as 6.8% to the cusp of $23,000, a level it was last at in mid-June, before giving up some gains to trade at $21,909 at 10 a.m in London. Ether at one point added almost 11%. Solana also achieved a double-digit percentage gain before falling back. Bitcoin has struggled to escape a $19,000 to $22,000 range as investors lick their wounds from a rout sparked by tightening monetary policy and exacerbated by the toppling of crypto lenders and the TerraUSD stablecoin.
  • Hasbro Inc. reported second-quarter earnings that beat analyst estimates, led by demand at its tabletop and digital games division. The largest US toy company on Tuesday reported profit of $1.15 a share, excluding some items, better than the 93-cent-a-share profit analysts predicted. Revenue rose 1% from a year earlier to $1.34 billion, missing the $1.37 billion analyst estimate.
  • After hiring more women and minorities in recent years, Meta Platforms Inc. warned that its ongoing efforts to cut costs and revamp products could make further inroads more difficult.  The company, which owns Facebook, Instagram and WhatsApp, issued a generally upbeat progress report on Tuesday showing that it has increased the diversity of its US workforce in the past year. That includes putting more women and underrepresented minorities in leadership and technical roles. A year ago, Meta reported that the number of women at the company had declined slightly. In some cases, Meta surpassed five-year goals that it established just three years ago. In 2019, the company set out to double the number of women on staff globally by 2024. It also sought to double the number of Black and Hispanic workers in the US over that same time period. It has done both ahead of schedule.

Jefferies Financial Group Inc. said it plans to spin off its Vitesse Energy unit to shareholders and sell Idaho Timber as part of a strategy to shrink its merchant-banking portfolio.  The Idaho Timber deal will be completed in two transactions at a sale price of $239 million, generating a pretax gain of $140 million, New York-based Jefferies said Tuesday in a statement.  “Today’s announcement is yet another milestone in our long-term plan to focus Jefferies on its core businesses — investment banking and capital markets,” Jefferies Chief Executive Officer Rich Handlersaid in the statement

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

*All sources from Bloomberg unless otherwise specified