July 5, 2023

Daily Market Commentary

Canadian Headlines

  • American Equity Investment Life Holding Co. accepted a $4.3 billion cash and stock takeover bid from an arm of Canadian investment giant Brookfield. Brookfield Reinsurance Ltd. agreed to buy all the shares in the US insurer it does not already own for $55 apiece, according to a statement on Wednesday. The offer represents a 35% premium to American Equity’s closing price on June 23, the last full trading day before Bloomberg revealed Brookfield’s interest. The deal to snap up one of the last remaining independent annuities providers in the US boosts Brookfield Reinsurance’s assets under management to around $100 billion. In recent years, private equity heavyweights ranging from Blackstone Inc. to KKR & Co. and Apollo Global Management Inc. have invested in such companies as a way of gathering more capital they can plow into alternative assets.
  • Quebecor Inc. said it’s withdrawing all advertising by its subsidiaries from Facebook and Instagram, after Meta Platforms said it will block news links in opposition to a new law that requires the company to pay news organizations.

World Headlines

  • European equities dropped as weak economic data from China weighed on sentiment while investors awaited minutes from the latest Federal Reserve policy meeting. The Stoxx Europe 600 fell 0.6% by 11:24 a.m. in London after a private survey showed expansion in China’s services industry slowed in June from the previous month. Mining and chemicals sectors were the biggest laggards. European stocks have been treading water in the first few days of July amid thin volumes following a strong first half. Investors will look for clues on when the Fed may resume its interest-rate hiking campaign when the minutes from its June meeting are released later Wednesday. Meanwhile, money managers are preparing for the earnings season to assess how companies have coped with headwinds such as higher rates and an uneven Chinese recovery.
  • US equity futures and European stocks followed Asian shares lower after weak services-industry data from China raised fresh concerns about the outlook for the global economy. Contracts on the S&P 500 and Nasdaq 100 both fell about 0.5%, suggesting US stocks may open lower when trading resumes after the Independence Day holiday. United Parcel Service Inc. fell in premarket trading as employees moved closer to a strike over pay. Monster Beverage Corp. gained more than 2% ahead of its earnings report on Thursday. With more interest-rate hikes anticipated from the Fed and the ECB in July, an aggregate gauge of borrowing costs calculated by Bloomberg Economics now shows a peak of 6.25% this quarter, up from 6% foreseen three months ago. Later Wednesday, traders will monitoring the minutes of the Fed’s last policy meeting, which left Wall Street perplexed as officials paused their rate-hike cycle after 10 consecutive moves, but forecast two additional increases this year.
  • Asian stocks fell as softer growth in China’s services sector added fresh signs that the nation’s economic recovery is faltering. The MSCI Asia Pacific Index dropped as much as 0.7%, led by financial and consumer discretionary shares. Stocks were down in most markets in relatively light trading following a holiday in the US. The Hang Seng China Enterprises Index extended losses to as much as 2% after the Caixin China services purchasing managers’ index came in weaker than in the previous month, the latest key data to show a slowdown. Traders are also monitoring US Treasury Secretary Janet Yellen’s China visit on Thursday to see whether that would ease tensions between the world’s two superpowers.
  • Oil weakened after rallying more than 2% Tuesday on Saudi Arabian and Russian production cuts. Global benchmark Brent dropped back below $76 a barrel following the gain in the previous low-volume session amid a US holiday. The two OPEC+ linchpins announced their latest batch of curbs on Monday, with a supply-cut extension by Riyadh and a fresh pledge to reduce production from Moscow. Crude has slumped this year amid China’s stuttering recovery and after central banks in the US and Europe raised rates to quell inflation, jeopardizing energy demand. Still, key metrics are now strengthening. Brent’s prompt spread — the gap between the two nearest contracts — is back in a bullish, backwardated structure, a sign of a tightening market.
  • Gold held steady as traders await minutes from last month’s Federal Reserve meeting for fresh hints on the central bank’s monetary-policy path. Bullion has declined about 6% from a 2023 peak in May, pressured by hawkish rhetoric from Fed officials following their June meeting when rates were left unchanged. Minutes from the gathering will be released later on Wednesday. Spot gold edged higher to $1,926.59 an ounce as of 9:17 a.m. in London. The Bloomberg Dollar Spot Index rose 0.1%. Silver, palladium and platinum declined.
  • Investors added money to exchange-traded funds that buy emerging market stocks and bonds last week. This was the fourth 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 $147.6 million in the week ended June 30, compared with gains of $418.2 million in the previous week, according to data compiled by Bloomberg. So far this year, inflows have totalled $8.6 billion.
  • The Federal Reserve on Wednesday will shed some light on the discussions at their June meeting that left Wall Street perplexed. The Federal Open Market Committee paused its interest-rate hikes after 10 consecutive moves spanning 15 months, even with inflation cooling more slowly than projected. At the same time, policymakers forecast two additional increases this year, more than expected, a confusing result that left investors seeking answers. The central bank and Chair Jerome Powell “have delivered a muddled message, and I assume it reflects an uncomfortable compromise between the hawks and doves on the committee,” said Kathy Bostjancic, chief economist at Nationwide Life Insurance Co. “The minutes might provide insight on that, but it might simply repeat the awkward explanation Powell has offered.”
  • The majority of Brazil’s top professional football clubs are set to sign an agreement with investors that could end a fight between rival leagues wrestling for control of the sport in the country. Under the agreement, Brazil-based Life Capital Partners and Serengeti Asset Management will purchase a 20% stake in the commercial rights of the participating teams for 50 years, according to a statement from the investors on Wednesday. Despite the historic successes of Brazil’s national team, its domestic football leagues have been dogged by years of financial mismanagement, while its clubs have consistently sold their best players to richer European teams. In an attempt to change things, local teams have explored the creation of a league structure that can keep top football talent in the country for longer and attract foreign investment through the sale of lucrative broadcast rights.
  • US Treasury Secretary Janet Yellen visits China this week with the goal of finding areas of common economic ground and opening communication channels amid an increasingly turbulent relationship between the world’s two biggest economies. It will be the first major test of a policy she outlined in April that’s geared toward defending and securing US national security without trying to hold China back economically. Yellen’s arrival Thursday comes days after China imposed restrictions on exporting two metals that are crucial to key technology industries, the latest escalation in a trade war that ramped up last year with US export controls on semiconductors and chipmaking equipment.
  • Tesla Inc.’s China deliveries are surging, along with other local electric-vehicle makers, as concerns over snarled supply chains, the lingering impact of Covid and weak consumer demand dissipate. Deliveries from Tesla’s Shanghai plant, which was its first outside the US, rose almost 20% from a year earlier in June to 93,680 vehicles, showing the disarray caused by a price war earlier this year is abating and interest in clean cars continues to grow in the world’s biggest EV market. The US automaker isn’t the only EV maker to benefit from the changing conditions. While overall car sales to dealers are expected to fall 5.9% in June from a year earlier, China’s Passenger Car Association forecasts a 30% increase for new-energy vehicles.
  • Borouge Plc surged the most in over a year as Abu Dhabi explores an ambitious plan to use the company to create a chemicals and plastics giant worth more than $30 billion. Shares of Borouge jumped as much as 9.4% in Abu Dhabi trading Wednesday, the biggest intraday gain since June 2022. They were up 4.1% at 11:44 a.m. in the United Arab Emirates, giving the company a market value of about $23 billion. Abu Dhabi and Austria’s OMV AG are discussing the valuation and ownership structure for a potential merger of Borouge and Borealis AG, people with knowledge of the matter said. The owners may reach the broad outlines for formal negotiations in the coming weeks, according to the people.
  • The Financial Conduct Authority has proposed setting up a single UK price feed for bond trades before it establishes one for equities, according to a statement on Wednesday. The UK watchdog is planning to run a competitive tender process to appoint one provider of the technology for fixed income, with a tape for equities following later. The technology will collate the price, size and timing of trades across multiple trading venues in the country to produce a centralized, near real-time feed. “The new consolidated tape will help reduce trading costs, increase transparency and improve data quality,” said Sarah Pritchard, executive director of markets and executive director of international at the FCA.
  • Chinese leader Xi Jinping called on nations to spurn decoupling and the cutting of supply chains, one day after his nation imposed limits on exports of two key metals used to make chips to counter Western restrictions on Beijing. The world’s No. 2 economy wants to work with nations to “reject the moves of setting up barriers, decoupling and severing supply chains,” Xi said in a virtual speech to Shanghai Cooperation Organization leaders. The remarks contrast with a decision by Xi’s government on Monday to subject gallium and germanium, along with their chemical compounds, to export controls. China’s Ministry of Commerce said the move was meant to protect national security.
  • The collapse of two US auto dealers and a growing pile of delinquent car loans are threatening to deliver losses in a corner of Wall Street that, until now, has been a sea of calm: the asset-backed securities market. Bonds backed by car loans made by U.S. Auto Sales and American Car Center, two used-car dealers that shut their doors earlier this year, have been veering into distress in recent weeks. Borrowers have been falling behind on payments, and Citigroup believes that some of the riskiest parts of three different asset-backed deals could fail to return principle to investors. Any lost principle would be a rare event in the ABS market, where subprime auto bonds haven’t failed to return investors’ money since the 1990s, Citigroup said. Prices on a bond issued by U.S. Auto Sales, owned by private equity firm Milestone Partners, have dropped to distressed levels, trading at a little over 18 cents on the dollar on June 26, according to Trace data.
  • More than 300,000 United Parcel Service Inc. workers are closer to striking after the company failed to reach an agreement with the International Brotherhood of Teamsters, threatening to plunge the US supply chain into disruption if a deal isn’t reached this month.  Weeks of talks between UPS and the Teamsters fell apart early Wednesday morning in Washington after stretching through the July 4 holiday, with beleaguered negotiators emerging just after 4 a.m. to say the talks had collapsed.