July 31, 2023

Daily Market Commentary

Canadian Headlines

  • Oil headed for its largest monthly increase in more than a year on signs the market is tightening, with estimates that crude demand is running at a record clip just as OPEC+ cuts back production. WTI rose above $81 a barrel. The union and employers at British Columbia ports reached a new tentative contract after a previous deal was voted down by unionized dockworkers.
  • After years of delays and hundreds of millions of dollars in cost overruns, a Montreal rail system planned, built and largely financed by Canada’s second-largest pension manager is finally rolling. How it performs will determine whether the project was an expensive experiment or the start of a whole new business line for the C$402 billion ($304 billion) investment firm. Caisse de Depot et Placement du Quebec undertook the 67-kilometer (42-mile) Réseau Express Métropolitain project in 2015 to link Montreal-Trudeau International Airport and several suburbs to the center of Canada’s second-biggest city. The project ran into unforeseen obstacles, including the Covid pandemic and the discovery of 100-year-old explosives in a tunnel, which pushed the budget from C$5 billion to more than C$7 billion ($5 billion).

World Headlines

  • European stocks were muted on Monday as the weakest corporate earnings season since 2020 outweighed optimism that interest rates were potentially peaking. Heineken NV dropped after cutting its profit forecast. The Stoxx 600 was up about 0.1% at 12:42 p.m. in London. The food and beverage subindex was among the biggest decliners as Heineken fell by the most since October, while energy and health care stocks outperformed. Europe’s benchmark index is on track to post its third monthly gain in four as investors bet that central banks were close to pausing rate hikes. However, stocks are now entering a period of typically poor seasonal returns, with sentiment further dampened by glum economic data as well as weak earnings.
  • Global equity markets struggled for direction as traders parsed the latest commentary from central bankers for clues on the path for interest rates. Apple Inc. and Amazon.com Inc. are among companies reporting in the coming days. European stocks and US equity futures were steady following a rally Friday that pushed the Nasdaq 100 nearly 2% higher amid optimism that a soft landing for the world’s biggest economy is within reach. This year’s advance on Wall Street suggests that US equities are tracking the same path they did in 2019, which was one of the best years for the S&P 500 over the past decade, according to Morgan Stanley strategist Michael Wilson. The benchmark is set to close out a fifth month of gains, the longest such winning streak since August 2021.
  • Asia’s equity benchmark was on track to cap its biggest monthly advance since January, thanks to an intensifying rally in heavyweight Chinese shares amid expectations of policy support. The MSCI Asia Pacific Index was up 0.3%, with its gain for the month at 4.4%. Chinese stocks in Hong Kong and on the mainland climbed as the nation’s government took incremental steps to boost consumption, spurring bets that authorities are keen to follow through on the promises made at last week’s Politburo meeting. Japan’s Topix index capped a seventh straight month of gains. Exporters led the advance after the yen weakened post the central bank’s adjustment of its yield-curve control program on Friday. The rally in Chinese stocks also boosted MSCI’s key emerging markets index. The measure was earlier on track for its highest close in 2023 before trimming gains.
  • Oil headed for its largest monthly increase in more than a year on signs the market is tightening, with estimates that crude demand is running at a record clip just as OPEC+ cuts back production. West Texas Intermediate traded slightly higher, above $80 a barrel, touching the highest since April. The US crude benchmark has rallied almost 14% this month, putting it on course for the biggest advance since January 2022. It’s the best performance for July in almost two decades. Oil’s string of advances mean futures in New York have erased their year-to-date losses, with expectations that the Federal Reserve is close to ending its cycle of monetary tightening also aiding sentiment as the dollar weakens.
  • Gold edged lower amid fresh pressure from rising Treasury yields as mixed US economic data muddied the outlook for the Federal Reserve’s likely rate path. The yield on 10-year Treasuries climbed 1% in Asia hours on Monday, after key gauges of inflation and labor costs showed signs of cooling last week even as second-quarter growth unexpectedly accelerated. The conflicting figures are contributing to volatility in bond yields and bullion. Both are up this month, despite higher yields generally being negative for gold, which doesn’t generate interest. Spot gold declined 0.2% to $1,955.17 an ounce as of 12:49 p.m. in Singapore, and was up almost 2% for the month. The Bloomberg Dollar Spot Index edged up. Silver, platinum and palladium all fell.
  • The euro-area economy returned to growth while underlying inflation pressures persisted — supporting early arguments for the European Central Bank to raise interest rates again. Second-quarter gross domestic product advanced by 0.3% from the previous three months after shrinking and stagnating in the two earlier periods, according to Eurostat data published Monday. A Bloomberg survey of economists saw an increase of 0.2%. A separate release showed consumer prices rose 5.3% from a year ago in July, as expected. But in a sign of lingering dangers, the closely watched underlying inflation measure that excludes volatile costs like food and energy overshot estimates by a touch to stay at 5.5%, surpassing the headline gauge for the first time since 2021.
  • The US Treasury is set this week to begin a ramp-up in issuance of longer-dated securities that’s likely to stretch into next year, forced by a rapidly deteriorating budget deficit and soaring interest rates. For the first time since early 2021, the Treasury will boost its so-called quarterly refunding of longer-term Treasuries, to $102 billion from $96 billion, the consensus among dealers suggests. While down from the record levels hit during the Covid-19 crisis, that’s well above pre-pandemic levels. Wednesday’s announcement will likely also see debt managers hoist regular auction sizes for securities across the yield curve — with potential exceptions or smaller bumps for notes less in demand. Dealers will be on watch separately for an update on a coming program to buy back older Treasuries.
  • Investors added money to exchange-traded funds that buy emerging market stocks and bonds last week. This was the eighth 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 $754.8 million in the week ended July 28, compared with gains of $719 million in the previous week, according to data compiled by Bloomberg. So far this year, inflows have totalled $13.4 billion.
  • Walmart Inc. paid $1.4 billion to buy Tiger Global Management’s remaining stake in Flipkart, boosting its bet on the Indian retailer and helping the money manager provide distributions to investors at a time when accessing liquidity is tough. The transaction, which took place in recent days, valued the Indian e-commerce giant at $35 billion, according to a letter sent by Tiger Global to investors that was obtained by Bloomberg News. That’s down from the nearly $38 billion valuation Flipkart commanded in its 2021 funding round. A spokeswoman for the investment firm declined to comment on the deal, which the Wall Street Journal reported on earlier Sunday.  The sale allows Tiger Global an opportunity to successfully exit its long-time investment in the Indian startup. The firm had initially put $8.6 million into Flipkart’s Series B round in 2009 at a valuation of $42 million, before subsequently adding $1.2 billion between 2010 and 2015, according to the letter. The investments were made via their venture Private Investment Partners funds five through nine, the hedge fund, and their long-only vehicle.
  • Heineken NV shares plunged after the Dutch brewer cut its earnings forecast on weakening consumption following double-digit price increases. Operating profit slumped 22% on an adjusted basis in the first half, the Amsterdam-based brewer said Monday. Beer volume dropped more than expected as Heineken boosted pricing by almost 13%.  Brewers are struggling to pass high raw material costs onto consumers without driving them away to cheaper brands. Heineken is the first of the big global beermakers to report first-half results, and its results may portend difficulties for rivals Anheuser-Busch InBev NV and Carlsberg A/S.
  • US equities are tracking the same path they did in 2019, which was one of the best years for the S&P 500 over the past decade as it handed investors a 29% return, according to Morgan Stanley’s staunch bear, Michael Wilson. “The data we have today suggests to us that we are in a policy-driven, late-cycle rally,” Wilson wrote in a note. The latest example of such a period occurred in 2019 when the Federal Reserve paused and then cut rates and its balance sheet expanded toward the end of the year. The S&P 500 has advanced 19% this year, almost the same return it posted in 2019 over the same period as it rebounded from a decline the previous year. In 2023, investors have looked past an earnings recession as the US economy holds up better than expected, bolstering hopes for a soft landing.
  • The world’s biggest shipping companies are plowing their pandemic windfalls into orders for new vessels on an unprecedented scale, making an industry known for hair-raising cycles of boom and bust more vulnerable in the latest downturn. Container carriers like MSC Mediterranean Shipping Co., A.P. Moller-Maersk A/S, CMA CGM SA and Hapag-Lloyd AG — all backed by European billionaires — are spending record profits gleaned during the health crisis to splash out on new models mostly from Korean and Chinese shipyards. This has pushed the global order pipeline to a historic level — almost $90 billion by one estimate. “Too many large container ships have been ordered,” said Erik I. Lassen, chief executive officer of Danish Ship Finance A/S, a company providing vessel financing. He noted that deliveries are now starting at a time when supply chains are running more smoothly and demand for freight transport is back to pre-pandemic levels.
  • Archer Aviation Inc. agreed to build as many as six of its Midnight electric air-taxis for the US Air Force as part of a deal worth up to $142 million. The deal marks an expansion of a 2021 partnership through the Air Force Agility Prime program, Archer said Monday in a statement. The electric vertical take-off and landing aircraft will potentially provide an alternative to helicopters for personnel transport and rescue operations. The US military has used Agility Prime contracts to back an array of eVTOL makers, including Archer and Joby Aviation Inc. — providing crucial support as the manufacturers work to raise funds, line up commercial customers and bring their new designs to market. Joby expects to deliver its first aircraft to the Air Force in 2024.
  • British consumers took on unsecured credit at the strongest pace in more than five years and sought more loans to finance house purchases, indicating resilience in the face of a jump in interest rates. The Bank of England said net consumer credit rose £1.67 billion ($2.1 billion) in June, the biggest increase since April 2018. Lenders authorized 54,662 mortgages, the most since October. Both figures were stronger than economists had expected. The figures suggest consumers are coping with the fastest rate-hiking cycle since the 1980s as the BOE attempts to tame inflation. The credit figures may show how poorer households are having to resort to debt to meet energy and food bills during the worst cost-of-living squeeze in generations.
  • UBS Group AG is planning to exit billions of dollars in loans to Credit Suisse’s clients in the Asia Pacific region, as the Swiss bank works to neutralize risks to its profitability and reputation from the defunct lender. The bank intends to either wind-down or sell off the majority of Credit Suisse’s more complex and higher-risk structured loans in APAC, people familiar with the matter said. Those riskier assets will be placed in the so-called “Non-Core Unit” for businesses that UBS doesn’t want, the people said. The bank is likely to keep less complicated loans made against liquid collateral — so-called Lombard loans — they said, who asked not to be named discussing private details.
  • US and European officials are growing increasingly concerned about China’s accelerated push into the production of older-generation semiconductors and are debating new strategies to contain the country’s expansion. President Joe Biden implemented broad controls over China’s ability to secure the kind of advanced chips that power artificial-intelligence models and military applications. But Beijing responded by pouring billions into factories for the so-called legacy chips that haven’t been banned. Such chips are still essential throughout the global economy, critical components for everything from smartphones and electric vehicles to military hardware. That’s sparked fresh fears about China’s potential influence and triggered talks of further reining in the Asian nation, according to people familiar with the matter, who asked not to be identified because the deliberations are private. The US is determined to prevent chips from becoming a point of leverage for China, the people said.
  • Glencore Plc has agreed to buyout its partner in an Argentinian copper project in a $475 million deal as the commodity giant and mining company seeks increased exposure to the metal. Glencore will buy Pan American Silver Corp.’s 56.25% stake in the Mara project, Pan American said in a statement Monday. Glencore already owned the rest of the project. The biggest miners are universally bullish on copper, expecting surging demand in the coming years as a greener world requires more of the metal in everything from electric vehicles to new power grids. That’s already led to a surge in deal-making, with the Rio Tinto Group and BHP Group securing their biggest deals in years, while Glencore itself tried to buy Teck Resources Ltd. to gain more copper.