July 24, 2023

Daily Market Commentary

Canadian Headlines

  • Canadian Prime Minister Justin Trudeau is expected to shuffle his cabinet soon, as a pileup of political controversies and the rising cost of living make him vulnerable to attacks by his main opposition rival. The rejig is one of his last opportunities to shake up his team before an election that’s likely to happen in the next two years. Trudeau faced a bruising first half of 2023, and observers say he needs his strongest communicators in crucial roles on his front bench. “You want folks out there who can not only tell the government’s story or sell the government’s message, but people who can really connect with Canadians, who have that kind of authenticity,” said Jeni Armstrong, a former lead speechwriter for Trudeau who now works as an instructor at Carleton University in Ottawa. While the headline annual inflation rate slowed to 2.8% in June, many Canadians don’t feel relief: Groceries and housing costs have risen much faster. Conservative Leader Pierre Poilievre has laid the blame at Trudeau’s feet, helping the Tories capture a lead of several points in most polls.

World Headlines

  • European stocks were subdued on Monday as investors braced for the busiest week of the earnings season and key central bank policy meetings. A rally in European stocks has lost steam this month amid worries about central banks remaining hawkish for longer. Investors will hear from the Federal Reserve and European Central Bank this week, with both central banks expected to raise rates by 25 basis points. Focus will remain on any clues about further rate hikes as US inflation slows while the labor market remains resilient. Meanwhile, the second-quarter earnings season kicks into high gear this week as Stoxx 600 companies with a combined market capitalization of $6.8 trillion are scheduled to report results, according to data compiled by Bloomberg. JPMorgan Chase & Co. strategists said they expect firms to beat the low bar for the quarter, but guidance might be tougher to raise given a loss of momentum and disappointing China dataflow.
  • Equity markets, meanwhile, are looking into their busiest earnings week this season, with more than 500 major companies worldwide due to report quarterly results, including US megacaps such as Alphabet Inc., and Meta Platforms Inc. The next few days will be crucial for investors, who will be watching to see if slowing economic momentum shows up on profit margins.
  • Asian equities were steady as traders awaited a wave of central bank decisions. Chinese stocks declined as the nation’s leaders were seen as failing to deliver major economic stimulus. The MSCI Asia Pacific Index rose as much as 0.4% before paring, with advances in industrial shares offset by losses in financials. Tokyo led gains around the region amid easing bets on a shift to tighter monetary policy by the Bank of Japan. Shares in South Korea also advanced. Benchmarks in mainland China and Hong Kong fell as investors tamped down their expectations ahead of a meeting of China’s top decision-making body this week. Chinese stocks retreated last week despite a series of vows to boost consumption and businesses, underscoring deep market skepticism.
  • Oil steadied after four weekly gains as traders weighed prospects for another hike from the Federal Reserve against signs of a tighter market. Brent crude traded little changed near $81 a barrel in London, having gained roughly 10% since late June. Prices have strengthened as Saudi Arabia and its partners in OPEC+ cut supplies. International Energy Agency Executive Director Fatih Birol said over the weekend that the market could return to a supply deficit. US central bank policymakers are widely expected to deliver another rate increase at this week’s meeting in their push to rein in inflation and give guidance on the likelihood of additional moves. The tightening cycle risks tipping the world’s largest economy into recession, potentially harming demand.
  • Gold was steady after posting its third consecutive weekly gain, with traders positioning for the Federal Reserve and the European Central Bank to increase interest rates and to signal whether more hikes are likely. Policymakers in the US and Europe are expected to raise borrowing costs by 25 basis points this week, though the greater focus will be on the messaging over whether further monetary tightening is coming — or if they plan an extended pause. Higher rates are typically negative for bullion, which doesn’t yield any interest.  Spot gold rose 0.1% to $1,964.30 an ounce at 10:19 a.m. in London, after closing last week up 0.3%. The Bloomberg Dollar Spot Index edged higher. Silver and palladium declined, while platinum was steady.
  • Germany and France kicked off the third quarter with contractions in their private-sector economies, with sustained weakness in manufacturing seeing increased spillover to services. S&P Global’s Flash Purchasing Managers’ Index for Germany dropped to the lowest level this year, with a July reading of 48.3 that fell below the 50 threshold that indicates growth. France fared even worse, hitting a 32-month low of 46.6. The figures for both countries were worse than predicted by any economist in Bloomberg surveys. In Germany, the negative reading was driven by manufacturing, which has been below 50 for more than a year and is now near levels last seen at the start of the pandemic in 2020. Growth in services slowed for a second month.
  • AMC Entertainment Holdings Inc. has revised a stock-conversion proposal after a surprise court ruling scuttled an earlier version of the plan and caused the movie-theater chain’s shares to jump. The company and investors leading the lawsuit filed a new version of the nine-figure settlement over the weekend in Delaware’s Chancery Court, seeking to address problems identified by Judge Morgan Zurn, who concluded last Friday the original deal waived too many claims against the company, according to people familiar with the filing. The filing won’t be publicly available until Monday, the people said. The ruling stunned some investors and analysts, who expected Zurn to sign off on the class-action settlement. AMC shares jumped more than 50% in premarket trading before New York exchanges opened on Monday. AMC Preferred Equity units, or APEs, fell about 7%.
  • Home prices are again on the rise after a brief dip last year, complicating the Federal Reserve’s effort to contain inflation and raising questions about how much further policymakers will have to hike interest rates. Demand for homes around the country continues to outpace supply, despite a rapid rise in borrowing costs spurred by the US central bank. While signs of easing price pressures have some policymakers eyeing the end of their tightening campaign, they could end up having to increase rates higher or hold them there for longer if the resilient housing market leads to slower progress on inflation, economists and Fed officials say. “If housing begins to recover more meaningfully, that raises the risk that inflation is going to be more sticky,” said Torsten Slok, chief economist for Apollo Global Management. “The real risk here is, meaning from a markets perspective, that the Fed has to step harder on the brakes.”
  • Elon Musk has changed Twitter’s logo, replacing its signature blue bird with a stylized X as part of the billionaire’s vision of transforming the 17-year-old service into an everything app. It only took 24 hours. Late on Saturday, Musk invited his 149 million followers to suggest an X logo, then chose one of the designs and made it the company’s new brand identity on Sunday. The X is now the social platform’s home page logo, Musk’s profile photo and even part of loading animations. He confirmed in responses to followers that he intends to adopt it as an interim design, which “probably changes later, certainly will be refined.” The graphic was later projected on Twitter’s San Francisco offices and adopted as a background image by Chief Executive Officer Linda Yaccarino, who tweeted her support and a photo of the multistory X.
  • Investors added money to exchange-traded funds that buy emerging market stocks and bonds last week. This was the second 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 $655.9 million in the week ended July 21, compared with gains of $1.81 billion in the previous week, according to data compiled by Bloomberg. So far this year, inflows have totalled $11.6 billion.
  • Johnson & Johnson will split off at least 80.1% of its shares of Kenvue Inc., its former consumer-health business that listed independently in May, via an exchange offer. Investors can exchange shares of J&J common stock for shares of Kenvue, the US health company said in a statement on Monday. The exchange can be made at a 7% discount, subject to an upper limit of 8.0549 Kenvue shares per J&J share tendered and accepted in the offer, the company said. Kenvue investors had worried after the exchange offer was announced last week that it would lead to dilution, potentially reducing both the value of existing stakes and their proportional ownership in the company. Kenvue, whose well-known brands include Band-Aid and Tylenol, has said it’s trying to make its supply chain more efficient even as slow recovery in China weighs on volumes for key products in Asia.
  • Apple Inc. is asking suppliers to produce about 85 million units of the iPhone 15 this year, roughly in line with the year before, according to people familiar with the matter. The Cupertino, California-based company is aiming to hold shipments steady despite tumult in the global economy and a projected decline in the overall smartphone market. It’s likely to increase revenue overall because Apple is considering raising the price for Pro models, said the people, asking not to be named because the targets aren’t public. The fortunes of Apple, the world’s most valuable company, reverberate through the global economy, driving business for thousands of suppliers and fueling employment for millions from the US and China to Vietnam and India. Its shares have surged almost 50% this year, pushing its market capitalization to $3 trillion.
  • Royal Philips NV fell after a decline in new orders and ongoing uncertainties on costs related to a product recall overshadowed a boost to the medical equipment maker’s full-year forecast. Comparable order intake dropped 8% during the second quarter from a year ago, Philips said Monday. The shares fell as much as 7.7%, the biggest drop since October last year, and were trading down 4.4% in Amsterdam as of 12:36 p.m. local time. The manufacturer had “fewer orders coming in then we would like,” Chief Executive Officer Roy Jakobs said in an interview. New healthcare licensing requirements in Russia contributed to the decline he said.
  • Goldman Sachs Asset Management and CVC Capital Partners’ credit unit are among a group of lenders providing a private debt package worth over £1 billion ($1.3 billion) for Partners Group-backed Civica, people familiar with the matter said. KKR & Co. Inc., Caisse de Depot et Placement du Quebec, Guggenheim Partners and GIC Pte are also part of the lending syndicate for the UK software business, which agreed a £750 million unitranche loan plus a £300 million acquisition line. The deal has no maintenance covenants and priced at 625 basis points over Sonia with an original issue discount of 97, said the people, who asked not to be named. Spokespeople for Partners Group, GSAM, CVC, KKR, CDPQ and GIC all declined to comment, while Civica and Guggenheim did not immediately respond to requests for comment by Bloomberg News.
  • 3M Co. has so many big problems on its hands that one veteran Wall Street analyst likened the conglomerate’s challenges to the Titanic — just after the iceberg. “We’re talking more about rearranging the deckchairs when you’ve got these big calamities bearing down on the company,” said Deane Dray, an RBC Capital Markets analyst who has covered 3M for nearly 20 years. That may sound like hyperbole for one of the longest-tenured components of the Dow Jones Industrial Average that generates more than $30 billion in sales and showers investors with $3 billion in annual dividends. Yet the magnitude of what 3M is confronting is immense.
  • A Blackstone Inc. real estate trust agreed to sell Simply Self Storage to Public Storage for $2.2 billion. Blackstone Real Estate Income Trust will sell the self-storage business, which includes 127 wholly owned properties, the companies said Monday in a statement. The deal is expected to close in the third quarter. Public Storage has been expanding in recent years, boosting its net rentable square feet by about 55 million since 2019. Earlier this year, Public Storage unsuccessfully sought to purchase Life Storage Inc., which was later bought by Extra Space Storage Inc.
  • Bank of Japan officials meeting this week will probably consider a sharp increase to their inflation forecast for this fiscal year, while also discussing concerns about whether the upward trajectory is sustainable, according to people familiar with the matter. The central bank’s policy board is likely to mull raising the consumer inflation projection to around 2.5% for the year ending in March, up from 1.8% in the April estimate, according to the people. They expect projections for the following fiscal years to be largely unchanged to reflect a lack of confidence the bank can achieve its 2% inflation goal in a stable manner, the people said. The BOJ will release its quarterly economic report together with a policy statement at the Friday conclusion of the two-day policy board meeting.