July 29, 2022

Daily Market Commentary

Canadian Headlines

  • A lingering trade dispute between the US and Canada is expected to keep tariffs on softwood lumber in place, adding to soaring inflation costs. The US is expected to  lower duty rates on Canadian softwood lumber in a ruling next week, but not get rid of them, said Susan Yurkovich, president of the BC Lumber Trade Council. That means Canadian companies will still have to pay tariffs hovering near 11%, heaping more costs on American homebuilders and buyers, she said. The Trump administration slapped tariffs on Canadian softwood lumber in 2017, saying the industry is unfairly subsidized. The US raised rates on imports in 2021 even as an unprecedented rally lifted prices to record highs during a pandemic-fueled homebuilding and renovation boom. US builders get more than a quarter of their lumber from Canada, the world’s largest softwood lumber exporter.

World Headlines

  • European stocks rose on Friday and were set for their biggest monthly gain since November 2020 as investors turn optimistic about corporate earnings and bet that the Federal Reserve will slow its rate hikes amid recession fears. The Stoxx Europe 600 Index was up 0.8% by 9 a.m. in London after jumping to a seven-week high in the previous session. Travel and leisure and mining stocks led the advance. Banking stocks also gained after a slate of better-than-expected results from Banco Bilbao Vizcaya Argentaria SA, Standard Chartered Plc and BNP Paribas SA. European stocks have rebounded this month after a sharp slump in the first half of the year as investors bet that much of the negative news around high inflation and slowing growth was largely priced in. Recent weakness in US economic data has also brewed optimism that the Fed could turn less hawkish in raising interest rates.
  • Nasdaq 100 futures added more than 1% after the US stock market hit a seven-week high Thursday. Amazon.com Inc. and Apple Inc. rose in premarket trading after both companies beat revenues estimates. Global shares are set for a second weekly advance, paring this year’s rout. The risk is that the recent bout of optimism eventually gets a reality check if inflation stays stubbornly elevated, leaving interest rates higher than investors would like amid an economic downturn.
  • Asian stocks were mixed as losses in Chinese equities offset gains in the rest of the region, after the nation’s top leadership refrained from announcing new stimulus. The MSCI Asia Pacific Index swung between small gains and losses on Friday. Alibaba and Tencent were among the biggest drags, countering gains in heavyweights including TSMC and Reliance Industries. The Hang Seng Index entered a technical correction, while a gauge of Hong Kong’s tech shares tumbled close to 5%. Sentiment was damped by Chinese leaders’ downbeat assessment of growth and the lack of new measures to boost the economy from a highly anticipated Politburo meeting. Shares of Alibaba tumbled after a report said that Jack Ma was planning to give up control of his fintech unit Ant Group, ahead of the tech giant’s earnings report next week.
  • Oil headed for a weekly increase on signs of tight physical supply, but remained down this month amid persisting fears of economic slowdown. West Texas Intermediate futures rose above $98 a barrel, bringing this week’s gain to about 4%. Prices are more likely to rise than fall as tight supply outweighs any risks to demand, Shell Plc Chief Executive Officer Ben van Beurden said on Thursday after the company posted record profit in the second quarter. Futures are still poised for the first back-to-back monthly decline since 2020 after fears over a slowdown fueled bearish sentiment across markets. The US economy shrank for a second quarter as rampant inflation undercut consumer spending. Citigroup Inc. says there are signs the oil market is moderating.
  • Gold headed for its biggest weekly gain since March amid speculation that the Federal Reserve will slow the pace of interest rate increases as the US economy slows. Bullion’s climb, supported by a weaker dollar and declining Treasury yields, saw prices hit a three-week high. While the Fed raised rates by 75 basis points again this week, data showing that the US is in a technical recession signaled that the central bank could become less aggressive as it combats inflation. Despite the rebound, gold remains on track for a fourth straight monthly loss, with bullion-backed exchange-traded funds set for the biggest outflow in July since March 2021. Treasury Secretary Janet Yellen gave a glass-half-full assessment of the economy, acknowledging a slowdown she called necessary to tame inflation while rejecting the notion the country had entered a recession.
  • Iron ore’s scorching five-day rally came to halt, with traders disappointed by a lack of fresh signals from Beijing that it will channel more funds toward China’s beleaguered property market. The steelmaking material sank as much as 5% after surging more than 20% from its close on July 21. Investors had been optimistic more aid was on its way to revive construction projects stalled by a wave of repayment boycotts from homebuyers, but none was forthcoming during a key Politburo meeting. Unlike during the April meeting where leaders spoke about “supporting local governments to improve real-estate policies,” Thursday’s meeting spoke of a broader directive to “stabilize the property market,” without specifically mentioning more supportive measures. Party leaders also delivered a generally downbeat assessment of economic growth prospects.
  • Chevron Corp. may lift capital spending next year to boost energy supplies as sky-high prices rip through economies around the globe. Chevron has room to increase expenditures above the current annual target of $15 billion a year without busting the $17 billion-a-year cap announced earlier this year, Chief Financial Officer Pierre Breber said during an interview. With the giant Tengiz project in Kazakhstan nearing completion, about $1 billion will be freed up for allocation elsewhere next year. US President Joe Biden administration has accused the oil industry of hoarding windfall profits, benefiting from the fallout from Russia’s invasion of Ukraine, and failing to invest in more drilling to expand energy supplies. Chevron announced a 50% hike in its share buyback plan on Friday after posting record earnings, but maintained it’s helping mitigate the pain for consumers.
  • President Emmanuel Macron made a plea to Saudi Crown Prince Mohammed bin Salman to help Europe move away from Russian oil and gas during a one-to-one dinner at the presidential palace in Paris on Thursday. During the meeting, Macron “stressed the importance of continuing the coordination with Saudi Arabia to diversify the energy supplies of European states,” according to a statement shared by Macron’s office on Friday, which largely insisted on the coordination between the two countries. Since Russia’s invasion of Ukraine, European countries have been looking for alternatives to Russian oil and gas, and Macron has reached out to leaders of oil-producing countries to contribute, recently welcoming the Emirati leader to Paris for a state visit, and speaking to his Iranian counterpart by phone.
  • Far-right leader Giorgia Meloni, who is riding high in opinion polls ahead of Italy’s September election, plans to follow European Union budget rules if she leads the next government, according to officials familiar with her thinking. Officials advising Meloni are also confident that her Brothers of Italy party won’t put at risk the reforms needed to unlock funds for the country from the EU, if she succeeds Prime Minister Mario Draghi after the Sept. 25 election at the head of a center-right coalition.  Italian bonds pared declines, narrowing the 10-year yield premium over German peers — a major gauge of risk in the region — by four basis points to 231 basis points.
  • Credit Suisse Group AG’s legal battle with billionaire client Bidzina Ivanishvili has spread to Singapore as the Georgian gears up for trial with a unit of the Swiss lender over what he claims are $800 million in losses tied to a rogue banker. Fresh from a big win in Bermuda earlier this year, the former Georgian premier is now suing a different subsidiary of Credit Suisse as part of his campaign to claw back profits frittered away by convicted fraudster Patrice Lescaudron. Barring a last-minute injunction, the case will go to trial in September in Singapore, threatening fresh negative headlines for Credit Suisse after repeated scandals and the appointment of a third CEO in less than three years.
  • Euro-zone inflation climbed to another all-time high, supporting calls for the European Central Bank to follow up its first interest-rate hike since 2011 with another big move. Consumer prices jumped 8.9% from a year earlier in July — up from 8.6% last month and driven once again by soaring energy and food costs. The number overshot the expectations of economists surveyed by Bloomberg, who saw a gain of 8.7%. The intensifying price pressures prompted the ECB to surprise economists by delivering a half-point increase in its deposit rate this month. President Christine Lagarde said at the time that it’s important to address any sign that inflation expectations are becoming entrenched.
  • The resurgent yen has hit a level that has traders wondering if a technical rebound may turn into a rally that derails the FX world’s favorite short. The Japanese currency climbed more than 1% Friday, rising for a third day in the wake of the Federal Reserve meeting, as reduced expectations for rate hikes caused hedge funds to cover short bets from one of the biggest global macro trades of the year. The cost to buy one dollar with yen has now dropped close to 5% from a mid-July high to below its 50-day moving average — a key support level watched by traders currently around 134.27. That paves the way for a decline toward 130, putting calls that the dollar-yen pair was destined to hit 140 firmly in the rearview mirror.
  • Amazon.com Inc. and Apple Inc. are set to add almost $230 billion in market value Friday after they joined technology peers Alphabet Inc. and Microsoft Corp. in assuaging investor concerns by reporting higher revenue even as consumers curb their spending amid rising inflation. Amazon jumped 13% in US premarket trading, while Apple advanced 2.8%.  Amazon expanded both its e-commerce and cloud-computing businesses, with Bloomberg Intelligence analysts noting that the company’s performance proves that “it is better positioned to weather inflationary pressures and benefits from a more-affluent customer contrary to Walmart.”
  • Chevron Corp. expanded share buybacks by as much as 50% after blowing past all profit forecasts with the strongest quarterly performance in company history. Adjusted per-share earnings reached $5.82, the San Ramon-based company said in a statement Friday, 86 cents above the Bloomberg Consensus. Chevron pledged to pour up to $5 billion more into stock repurchases just three months after its last boost. The inflated buyback program puts Chevron on par with larger rival Exxon Mobil Corp., which is scheduled to disclose second-quarter results later Friday. Chevron followed European giants Shell Plc and TotalEnergies SE in garnering massive profits from surging energy prices.
  • Xiaomi Corp. is facing difficulties getting regulatory approval for its electric vehicle project in China, an unexpected hurdle for the smartphone giant’s $10 billion carmaking endeavor. The Beijing-based company has been talking to officials at the National Development and Reform Commission about the licensing for months without success, according to people familiar with the matter. Xiaomi is one of the later would-be entrants to a Chinese EV sector already teeming with rivals, including longer-established names BYD Co. and Nio Inc.But billionaire co-founder Lei Jun, who has said EVs will be his final startup endeavor, hopes Xiaomi’s expertise in connected technologies and building loyal user communities can translate in the world’s biggest EV market. But the longer the delay in securing a license, the bigger the head start its rivals will gain.
  • The Swiss National Bank reported a loss of 95.2 billion francs ($100 billion) for the first six months of the year as the global market slump eroded the value of its foreign-currency holdings. The figure represents the central bank’s worst first-half performance since the SNB was established in 1907, according to a spokesman. These results, however, have no bearing on monetary policy. The loss on foreign-currency positions amounted to 97.4 billion francs. There was a valuation gain of 2.4 billion francs on gold holdings and a 44 billion-franc loss on equity securities and instruments.
  • Global central banks made one of their biggest forecasting failures on record when they woefully underestimated the magnitude and duration of the worst inflation surge in decades. As the following series of charts from the Group of Seven economies shows, most central banks have made repeated errors — forcing them to continuously revise up their forecasts for consumer prices. The Federal Reserve and most counterparts are now racing to make up for lost time by raising interest rates the most in decades. That means borrowing costs may end up higher than if the hiking started sooner. And the record of failure on forecasting could undermine confidence in the current assurances that a soft landing is still possible.
  • Chevron Corp. expanded share buybacks by as much as 50% after blowing past all profit forecasts with the strongest quarterly performance in company history. Adjusted per-share earnings reached $5.82, the San Ramon-based company said in a statement Friday, 86 cents above the Bloomberg Consensus. Chevron pledged to pour up to $5 billion more into stock repurchases just three months after its last boost. The shares climbed more than 3% in pre-market trading. The inflated buyback program puts Chevron on par with larger rival Exxon Mobil Corp., which is scheduled to disclose second-quarter results later Friday. Chevron followed European giants Shell Plc and TotalEnergies SE in garnering massive profits from surging energy prices.
  • Meta Platforms Inc. reiterated its threat to pull its popular Facebook and Instagram services from the European Union if a new transatlantic data transfer pact doesn’t materialize. Its latest warning comes amid an imminent data flow ban it already faces from Ireland’s data protection watchdog, which oversees the tech giants based in the country. The Irish Data Protection Commission could issue a key decision on a possible ban of EU-US data transfers under so-called standard contractual clauses in the next three months, Meta said in a regulatory filing, which could risk paralyzing transatlantic data flows. The EU and US in March broke a deadlock to reach a tentative deal on a new data-transfer pact after a previous accord was struck down by the bloc’s top court over concerns US agencies could snoop on the information without adequate privacy safeguards. Negotiations on a new pact won’t likely conclude before next year, by which time the Irish might already have issued their ban on the SCCs.
  • Exxon Mobil Corp. posted its best-ever profit, reaping the rewards from surging commodity prices as supply disruptions run headlong into rising demand and consumers feel the pinch. Second-quarter adjusted earnings of $4.14 per share beat the $3.98 forecast by the Bloomberg Consensus. Net income reached $17.9 billion, surpassing the previous record set in 2008. The biggest North American oil explorer followed European giants Shell Plc and TotalEnergies SE in disclosing unprecedented results. Exxon’s sky-high profits come at a dicey political time for the oil industry, which has been accused of profiteering from the fallout from Russia’s invasion of Ukraine and failing to invest enough in new drilling. Still, the recent retreat in crude and gasoline prices may provide executives with some cover from the political backlash they faced in June, when President Joe Biden accused Exxon of making “more money than God.”
  • US President Joe Biden and Chinese President Xi Jinping told aides to plan an in-person meeting during a Thursday call, a US official said, as both leaders staked out their positions in a simmering dispute over Taiwan. If confirmed, it would be their first face-to-face exchange since Biden became president, and a sign that Xi plans to return to in-person diplomacy after not leaving China for more than two years due to Covid controls. The Chinese Foreign Ministry statement didn’t mention any such meeting, saying only that the two men agreed to keep up communications.  The fifth conversation between the leaders of the world’s two largest economies centered on Taiwan, a longtime flashpoint exacerbated by US House Speaker Nancy Pelosi’s possible visit to the island next month. Beijing has warned of a “firm and strong” response if the trip goes ahead.
  • A Russian state-owned company is transferring money to a subsidiary that’s building a $20 billion nuclear power plant on Turkey’s Mediterranean coast, alleviating concerns the project could be delayed by war sanctions.  Rosatom Corp. last week sent around $5 billion to the Turkey-based builder, formally known as Akkuyu Nuclear JSC, with two other similar dollar transfers planned for this week and next, according to senior Turkish officials with direct knowledge of the matter. The power plant is considered critical for Turkey if it’s to satisfy ever-growing energy needs, slated to meet 10% of the country’s domestic electricity demand once all four reactors become operational. Russia and Turkey have economic ties going back decades, and Turkish President Recep Tayyip Erdogan has been careful not to alienate the Kremlin since Russian troops invaded Ukraine.
  • BNP Paribas SA beat analysts’ estimates for revenue and profit in a volatile second quarter as income from lending rose and a push to expand the equities business lifted the trading result. Revenue at the unit that houses BNP’s retail operations rose 11%, reflecting higher fees, rising interest rates and gains in specialized businesses, BNP said in a statement Friday. In the corporate and investment bank, equities trading rose 16%, double what the biggest Wall Street banks reported, after a series of deals to make BNP one of the top European firms in that business. Chief Executive Officer Jean-Laurent Bonnafe has used the financial strength of BNP, one of the biggest and most valuable banks in the region, to bulk up as rivals struggled with negative rates. After agreeing to sell his firm’s US arm, he’s well positioned to deploy excess capital for more deals as rising borrowing costs make banking in Europe profitable again.
  • China has begun a series of investigations into key figures responsible for shaping chip policy and investment, raising questions about the impact on Beijing’s blueprint for challenging US dominance of a $550 billion industry. The top anti-graft agency this week launched an investigation into the minister who spearheads the country’s plan to build a world-class chip industry and wean itself off American silicon. Minister of Industry and Information Technology Xiao Yaqing, whose agency oversees giants from Huawei Technologies Co. to Xiaomi Corp., became the most senior sitting cabinet member to face a disciplinary probe in almost four years. The same day, Caixin reported that Ding Wenwu, head of a high-profile state-backed fund that invested tens of billions of dollars in the semiconductor industry, was unreachable after he became the target of a probe.
  • Alibaba Group Holding Ltd. fell for a third straight day as investors assessed the impact of Jack Ma reportedly ceding control of his fintech arm, and as worries over its earnings dragged. Shares closed down 6.1% in Hong Kong on Friday, among the biggest decliners on the Hang Seng Tech Index. The tech giant is expected to report its first-ever negative quarterly revenue growth next week. Selloff continued as traders debated the implications of a report that Ma may give up his reign over Ant Group Co., a third of which is owned by Alibaba. While the move can clear some regulatory headwinds for both entities, a change in leadership may delay the initial public offering of Ant.
  • Sony Group Corp. cut its profit outlook as its PlayStation division faltered and game sales slumped. The Tokyo-based entertainment conglomerate said on Friday that it now expects 1.11 trillion yen ($8.3 billion) in operating profit, down from 1.16 trillion yen previously. The gaming and network services group, which houses the PlayStation business, accounted for the full revision, taking a 16% cut from 305 billion yen to 255 billion yen. Sony revised its outlook on costs related to its acquisition of Bungie Inc., the weaker yen and lower expectations for third-party software sales on the platform. The company’s games underwhelmed in the April-June quarter with 47.1 million sales of PlayStation 4 and 5 titles, down from 63.6 million in the same period a year ago. Play time across PlayStation products was down 15% in the quarter, Chief Financial Officer Hiroki Totoki said, and PlayStation Plus members fell slightly to 47.3 million.

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

*All sources from Bloomberg unless otherwise specified