July 27, 2023

Daily Market Commentary

Canadian Headlines

  • Prime Minister Justin Trudeau placed greater emphasis on portfolios such as housing and the Treasury Board in an extensive cabinet shuffle, shoring up his economic bench as his government faces attacks over the rising cost of living. Wednesday’s remake is expected to be Trudeau’s last major change to his cabinet before an election sometime in the next two years. His chief rival, Conservative Leader Pierre Poilievre, has blamed government policy for the skyrocketing prices of food and shelter. While Trudeau left Finance Minister Chrystia Freeland and Industry Minister Francois-Philippe Champagne in their roles, he moved Anita Anand from defense to the Treasury Board, where she will be responsible for government administration and the public service. He also shifted Sean Fraser from immigration to housing and infrastructure.

World Headlines

  • European stocks gained on a busy day of earnings reports and ahead of an interest rates decision from the region’s central bank, while traders increasingly bet that the Federal Reserve is close to the end of its tightening cycle. Barclays Plc shares slumped after its second-quarter trading revenue fell 41%. The Stoxx Europe 600 climbed 1.1% by 10:13 a.m. in London. Media and technology stocks stocks outperformed while energy stocks were in the red. Shell Plc shares declined after second-quarter profit fell from the highs seen last year, offsetting its pledge of additional share buybacks and a higher dividend. The ECB is widely expected to follow the Fed with a 25-basis points hike. What’s more in focus is any insight on whether policymakers will raise again when they next convene in September, or whether they’ll refrain.
  • Global equities surged and the dollar retreated, as investors wagered the Federal Reserve has reached the end of its 16-month long policy-tightening cycle. US futures pointed to a strong Wall Street session. Contracts on the tech-heavy, policy-sensitive Nasdaq 100 were up 1.3%, led by an 8% premarket surge in Facebook parent Meta Platforms Inc. The moves come after the Fed raised the federal funds rate to a 22-year high and while it signaled further hikes would be data dependent, many investors reckon it’s done hiking interest rates. They have trimmed bets on more increases this year, as Fed Chair Jerome Powell pointed to signs that higher borrowing costs are working to curb price pressures.
  • Asian equities climbed, with a rally in Chinese technology stocks and speculation that the Federal Reserve is nearing the end of its rate-hike cycle helping drive the regional benchmark toward its 2023 high. The MSCI Asia Pacific Index jumped as much as 1.1%, set for a fourth day of gains and approaching this year’s peak seen in late January. Chinese tech companies provided the biggest boost as electric-vehicle shares surged on plans by Volkswagen AG to invest in XPeng. The EV maker’s stock soared 34%, leading the rally in Hong Kong’s Hang Seng Tech Index and putting the gauge on track for a technical bull market. Equities in most of Asia’s emerging markets rose as the dollar slid following the Fed’s meeting, where the US central bank raised interest rates to a 22-year high and said further tightening would be data dependent. A weaker greenback is seen as beneficial for growth in the region’s developing economies, many of which rely on imports priced in dollars. Japanese stocks also edged higher ahead of a monetary policy decision on Friday.
  • Oil advanced, tracking gains in wider equity markets, after US crude inventories declined and the Federal Reserve indicated that any more rate hikes would be data-dependent. West Texas Intermediate traded above $79 a barrel, rising for the fifth time in six sessions. There’s growing speculation the Fed is nearing the end of its monetary tightening cycle, after it raised interest rates on Wednesday for the 11th time since March 2022. The dollar also weakened, with a Bloomberg gauge of the greenback on its third day of declines, making commodities cheaper for most international buyers. Oil has broadly rallied since late June, aided by supply cuts from the Organization of Petroleum Exporting Countries and its allies, and signs that Russian seaborne crude exports are falling.
  • Gold climbed for a third day as the dollar fell, with traders pricing in lower odds of further US monetary tightening in September after the Federal Reserve raised rates to the highest level in 22 years. Meanwhile, prospects for a peak in US interest rates could soon see investors take a shine again to gold-backed exchange traded funds, according to UBS commodity analyst Giovanni Staunovo, who sees inflows turning positive in the fourth quarter and gold hitting a record high in 2024. Sustained ETF buying is usually a key driver for bullion. Spot gold climbed 0.2% to $1,975.99 an ounce as of 10:03 a.m. in London, after gaining 0.4% on Thursday. The Bloomberg Dollar Spot Index fell 0.3%. Silver and palladium steadied while platinum rose.
  • Meta Platforms Inc. is back. Nearly 18 months after setting the record for the biggest market value wipeout in stock-market history, Meta’s shares are on pace to claiming those levels. The Facebook and Instagram parent lost $251 billion in a single day in February last year as it flagged slowing revenue growth due to stiff competition, which triggered a rolling rout that haunted the stock for most of 2022. Cut to 2023, its revenue growth is recovering, costs are under control and Reels — short-form videos that are similar to what users see on rival TikTok — has succeeded in increasing usage, and is now also helping draw advertisers.
  • The Federal Reserve’s own economists have joined the group of private-sector forecasters who are rethinking their calls for a recession this year, or becoming more confident the US will skirt a downturn altogether. Their growing faith in the economy is set to be strengthened on Thursday, when government data will probably show gross domestic product expanded at a 1.8% annualized pace in the April-to-June period. That would be down only slightly from 2% in the previous quarter, and roughly in line with the Fed’s assessment of a sustainable long-term rate. While consumer spending — which accounts for most of the economy — likely cooled significantly in the last three months, a turn higher in business investment may have offset it. Such spending, including on factories, has been helped by subsidies enacted by President Joe Biden with the intention of reducing US dependence on China.
  • President Joe Biden is unveiling a series of new actions to protect Americans from extreme heat conditions, as communities around the country continue to struggle with record high temperatures and the lingering effects of Canadian wildfires. Biden has asked the Department of Labor to issue a hazard alert, reaffirming that workers have heat-related protections under federal law, according to the White House. As part of the alert, the DOL will provide information on what employers should do to protect workers from extreme heat and ensure employees are aware of their rights. The agency will also ramp up enforcement of heat-safety violations and increase inspections in high-risk industries such as construction and agriculture.
  • Barclays Plc shares fell after the lender cut its guidance for net interest margin at its retail bank, a potential drag on earnings as rate rises come to an end. The UK lender reduced the net interest margin outlook for its domestic unit for this year to 3.15%, down from 3.2%, reflecting customers chasing better yields to cope with higher rates “and further macroeconomic developments.” Finance Director Anna Cross said customers were reacting rationally to the highest rates in 15 years, with more than a quarter of mortgage customers overpaying on their loans. She said there’s “not a huge amount of growth in the market but it is extremely active” as borrowers hunt for the cheapest deals possible.
  • Shell Plc’s second-quarter profit fell from the highs seen last year but the company pledged extra share buybacks and raised its dividend. The results are broadly in line with industry peers Chevron Corp. and Equinor ASA, where the decline in oil and gas prices dragged earnings lower even as production increased. Shell also reported a drop in the performance of its gas-trading unit, which in previous quarters generated big returns diverting cargoes of liquefied natural gas to Europe. The London-based oil major said it would buy back $3 billion worth of shares over the next three months and at least $2.5 billion after that. That’s slightly ahead of the $5 billion of repurchases pledged for the second half. Shell also increased its dividend as previously announced.
  • A cargo ship carrying almost 3,800 cars and construction vehicles is likely to continue burning for days, according to the Dutch coast guard, which is leading efforts to contain the blaze. BMW AG and Mercedes-Benz Group AG each have several hundred cars among the cargo aboard the Fremantle Highway, which caught fire off the cost of the Netherlands after midnight Wednesday. One crew member died and others were injured and taken from the scene by helicopters and lifeboats, authorities said. The fire was still ablaze with the situation stable as of 12:30 p.m. Amsterdam time Thursday, a coast guard spokesperson said. Towing or salvage operations can only take place after the fire is put out, according to the Dutch Ministry of Infrastructure and Water Management.
  • The European Central Bank is set to lift interest rates by another quarter-point as investors ponder if this could be the final salvo in officials’ yearlong campaign of hikes. Thursday’s advance in the deposit rate to 3.75% has been widely flagged by President Christine Lagarde and her colleagues. What’s of most interest is whether policymakers will raise again when they next convene in September, or whether they’ll refrain. Clues on the outcome of that meeting are unlikely, with a flood of data due in the interim and recent figures revealing fiercer underlying inflation pressure alongside a weakening euro-zone economy. Announcing its decision, after Wednesday’s hike by the Federal Reserve, communication may be the ECB’s key challenge. Policymakers will want to retain maximum flexibility by not sending too-decisive a signal in either direction.
  • Southwest Airlines Co. fell after warning of higher-than-expected costs, pressuring the carrier’s earnings and countering gains from a surge in early-summer travel. Adjusted profit was $1.09 a share in the period, the airline said Thursday in a statement, matching the average of analyst estimates compiled by Bloomberg. Operating revenue of $7 billion was also roughly in line with Wall Street’s expectations. The mixed results underscore the increasingly uncertain environment for US carriers, which have grappled with elevated labor costs, weather-related disruptions and signs of a possible moderation in domestic travel. Southwest, which derives most of its revenue from US flights, cited “strong leisure demand” during the second quarter and into July, but offered few predictions on travel trends for the rest of the quarter or full year.
  • McDonald’s Corp. reported second-quarter sales and profits that surpassed analysts’ projections, a sign that it’s still attracting diners despite tighter household budgets and higher menu prices. The key metric of comparable-store sales rose 11.7% in the quarter, besting the 9.4% average estimate compiled by Bloomberg. In the US, McDonald’s benefited from “strategic menu price increases” and an advance in guest counts. Earnings of $3.17 a share, excluding some items, also exceeded expectations. Comparable sales in international markets also beat estimates, led by growth in the UK, Germany and China.
  • Yields on 10-year Treasuries may fall as much as 150 basis points before the end of next year as the Federal Reserve cuts interest rates to bolster a slowing US economy, according to Jupiter Asset Management. The Fed’s most aggressive rate-hike cycle since the 1980s will take a toll on economic growth, and prompt the central bank to execute a policy pivot, said Matthew Morgan, head of fixed income at Jupiter Asset. The firm managed around $63 billion of assets as of end-March. Markets “can easily see yields coming down 100, 150 basis points at the long end if recession starts to bite,” Morgan said in an interview in Singapore on Wednesday. “And that can be really quite violent — particularly if growth is falling while inflation is falling.”
  • Ukraine kicked off a long-awaited thrust in its counteroffensive with an armored assault on Russian fortifications in the south that may be part of a push to cut Moscow’s land link to its strongholds in occupied Crimea. The assault coincided with new Russian missile attacks against infrastructure in Ukraine’s Odesa region which killed one person and damaged a grain cargo. Wheat prices rose, continuing a climb that began last week when Ukraine’s Black Sea export deal collapsed. A US official who asked not to be identified discussing details of military operations said Ukrainian troops were making a significant push in the southeastern Zaporizhzhia region. Russian officials also reported a major Ukrainian assault more than seven weeks after Kyiv launched attacks against invading forces across the frontline.
  • Comcast Corp. topped analysts’ estimates for profit in the second quarter, boosted by price hikes for faster broadband connections earlier in the year and an equipment upgrade offer, even as internet and TV subscribers vanished. The Philadelphia-based owner of Xfinity broadband and cable services, the NBCUniversal media empire and Sky TV, reported earnings excluding some costs of $1.13 a share, a 12% increase from a year earlier and well above the 97 cents analysts predicted. Revenue rose 1.7% to $30.5 billion, exceeding analysts’ average prediction of $30.1 billion. Results at the media and telecom conglomerate showed a disparity in trajectories among the various units as Chief Executive Officer Brian Roberts and president Mike Cavanagh revamp the media business after key executive departures, while cord-cutting and wireless competition has eroded Comcast’s traditional customer base.