July 6, 2023

Daily Market Commentary

Canadian Headlines

  • Canada has reached an agreement with automaker Stellantis NV to increase government financial support for an electric-vehicle battery plant, ending a standoff that began in May when the carmaker halted construction on the project. The plant, built in partnership with South Korea’s LG Energy Solution Ltd., will be located in Windsor, Ontario, across the border from Detroit. It’s expected to cost more than C$5 billion ($3.8 billion) to build. The project was first announced in March 2022, but the passage of the incentive-rich US Inflation Reduction Act last summer threw a wrench into the process. Canada publicly promised to create a level playing field with the US subsidies, but talks with Stellantis on how to do that dragged on for many months.
  • Toronto’s housing market slowed in June for the first time in five months. The number of homes sold in Canada’s largest city fell 6.9% from the month before, on a seasonally adjusted basis, while the benchmark price climbed 2.5% to C$1.16 million.

World Headlines

  • European stocks retreated by the most in two weeks following hawkish minutes from the Federal Reserve’s last policy meeting, with investors also weighing early corporate earnings reports. The Stoxx 600 was down 1.1% at 9:14 a.m. in London — the biggest intraday drop since June 22. All sectors declined, led by travel and leisure and retail. After rallying nearly 9% in the first half of the year, European equities have started July with declines as investors worry faltering economic growth will hammer corporate earnings while inflation remains sticky. Minutes of the Fed’s meeting, released Wednesday, showed officials struck a tenuous agreement to pause interest-rate increases in June, all but committing to hike again later this month.
  • Stocks and US futures fell with bonds on signs that central banks will keep driving up interest rates to tame inflation. Contracts on U.S. gauges signaled further losses on Wall Street after Wednesday’s Federal Reserve commentary stoked worries that officials will resume tightening policy. Exxon Mobil Corp. fell in premarket trading after forecasting a $4 billion hit to earnings from lower gas prices and refining margins. Stocks are losing ground after a strong first half of the year as continued hawkishness from central banks damps hopes of a soft landing for the global economy. Minutes from the Fed’s June meeting showed division among policymakers over the decision to pause rate hikes, with the voting members on track to take rates higher this month.
  • Asian stocks fell as the Federal Reserve’s minutes showed a hawkish tilt, denting risk sentiment ahead of key US economic data releases. The MSCI Asia Pacific Index dropped as much as 1.7%, led by material and financial shares. Most markets in the region were down, with Hong Kong, Japan and Taiwan the worst performers. The Hang Seng Index fell more than 3% as traders await US Treasury Secretary Janet Yellen’s visit to China. Yellen is set to arrive in China on Thursday amid persisting tension between the two countries on trade and key technologies. Earlier this week, China imposed restrictions on exporting two metals used in semiconductors, the latest escalation in the ongoing Sino-US tech rivalry.
  • Oil edged higher as traders assessed the impact of the latest round of supply curbs from OPEC+ and a US industry report that pointed to another drawdown in nationwide commercial inventories. West Texas Intermediate traded above $72 a barrel, following announcements from Saudi Arabia and Russia that they would reduce supplies in a bid to stem a slide in prices. Traders were awaiting the kingdom’s monthly official selling prices, expected Thursday. The American Petroleum Institute estimated that nationwide US crude inventories declined by 4.4 million barrels last week, according to people familiar with the data. Official figures will follow later on Thursday, with stockpiles last reported at the lowest level in almost six months.
  • Gold traded near this week’s lows following the release of minutes from the Federal Reserve’s June meeting that showed officials all but committing to raise interest rates again. The minutes indicated a majority of policymakers — “almost all” — agreed that more tightening will likely be needed this year. That, coupled with a reference to the importance of post-meeting communication to clarify officials’ intentions, provided ample evidence that the Fed likely isn’t done. Bullion fell last month following hawkish commentary from Fed officials, which spurred swaps traders to price in more tightening by the central bank later this year. Higher interest rates typically curb investor demand for the non-yielding asset.
  • Weekly hours worked — an early indicator of changes in hiring patterns as well as demand — has reached a key inflection point. Businesses, especially those that have struggled to hire and retain workers, typically seek out a number of different ways to handle softening economic conditions before laying off workers en masse. That includes scrapping job postings, hiring less, cutting temporary help and reducing hours. Average weekly hours have fallen in three of the last four months, dropping to the bottom of the 34.3-34.6 hours range Julia Pollak, chief economist at ZipRecruiter, views as the “happy, healthy range for hours in the economy.” The June figure will be released in Friday’s jobs report.
  • Tesla Inc. and China’s top automakers pledged to maintain fair competition and avoid “abnormal pricing” in the world’s biggest EV market, signaling a possible end to a price war that’s rattled the industry this year. Executives from 16 companies took part in a signing ceremony at the China Auto Forum in Shanghai on Thursday, acknowledging and committing to four points laid out in the pledge. They included BYD Co., Nio Inc., Xpeng Inc., Geely and Chery Automobile Co., while Tesla was the only foreign brand. The Austin, Texas-based electric-vehicle maker started cutting prices in China late last year, prompting other major brands to join in with steep discounts in the earlier part of 2023 as sales slowed.
  • Bets on the trajectory of the Bank of England’s key interest rate surged to the highest level in a quarter century as traders questioned officials’ ability to tame inflation without hobbling the UK economy. Money markets are now fully pricing a terminal rate above 6.5% by March, according to interest-rate swaps tied to policy-meeting dates. That would be the highest since 1998 and compares with wagers on a 5% peak just a couple of months ago. Pushing borrowing costs to that level would drive mortgages deeper into the BOE’s pain zone, making credit for businesses less affordable and delivering a sharp blow to an economy that’s been sputtering since the pandemic. That would add to the difficulties facing Prime Minister Rishi Sunak’s government ahead of an election widely expected next year.
  • US Treasury officials visited Hong Kong in June to urge the city’s central bank, financial institutions and other groups to curb the flow of advanced American-made technology into Russia, the Nikkei reported. Three officials from the Treasury Department’s terrorist financing and financial crimes department held meetings on June 15 and 16 in Hong Kong, according to the news organization, which cited unidentified people. They asked banks and regulators to help identify US high-tech items being shipped to Russia via the Asian financial hub, the people said.  The officials also told those in attendance to strengthen their due diligence when dealing with transactions related to items on the US export control list, according to the report.
  • Tata Group is considering an offer to buy back a stake in its entertainment content distribution platform from Temasek Holdings Pte as the Indian conglomerate weighs postponing Tata Play Ltd.’s initial public offering, according to people with knowledge of the matter. Tata Group is contemplating whether to delay the planned Tata Play listing because of market conditions, the people said. Instead, Tata Group has started discussions with Temasek around a deal that would give the Singaporean state investor an opportunity for a long-awaited exit from its investment in the platform, formerly known as Tata Sky, the people said. Temasek owns about 20% of the content distribution platform, one of the people said, asking not to be identified as the information is private. A joint venture between Tata Group and Walt Disney Co.’s Twenty-First Century Fox Inc., Tata Play provides pay television via set-top boxes and over-the-top video streaming through its app, according to the conglomerate’s website.
  • Private equity firm GTCR LLC agreed to buy a majority stake in Worldpay, the merchant-acquiring business of Fidelity National Information Services Inc., in a deal valuing the target at $18.5 billion. FIS will receive upfront, net proceeds of about $11.7 billion and retain a non-controlling 45% ownership interest in the new standalone joint venture, according to a statement Thursday. The valuation includes $1 billion contingent on returns realized by GTCR. The cash proceeds will create capital-allocation flexibility, and FIS said it will use the funds to pay down debt and return additional capital to shareholders, as well as for general corporate purposes.
  • Artificial intelligence-driven gains can propel Microsoft Corp. to join Apple Inc. in the elite category of stocks with a market capitalization of more than $3 trillion. That’s according to analysts at Morgan Stanley, whose new $415 price target for the software giant implies a valuation of around $3.1 trillion. The analysts, led by Keith Weiss, named Microsoft their top pick among large cap software companies, and said that it is the best placed in the sector to benefit from the growth of AI. A market frenzy for all things AI-related has supercharged Microsoft shares this year. Startup OpenAI Inc., which is backed by Microsoft, has fueled much of the excitement amid the viral success of its ChatGPT tool. Microsoft is now looking to overhaul its entire lineup of Office apps — including Excel, PowerPoint, Outlook and Word — with OpenAI technology.
  • Announced job cuts by US employers fell in June to an eight-month low, representing a pause in this year’s flurry of planned dismissals. There were 40,709 planned job cuts, according to data released Thursday by Challenger, Gray & Christmas Inc. While down by nearly a half from May, dismissals were still more than 25% higher than in June 2022 and bring the total this year to 458,209 — the worst first-half since 2020. “The drop in cuts is not unusual for the summer months,” Andrew Challenger, senior vice president of Challenger, Gray & Christmas, said in a statement. “In fact, June is historically the slowest month on average for announcements. It is also possible that the deep job losses predicted due to inflation and interest rates will not come to pass.”
  • Bitcoin advanced to a fresh high after several giants of traditional finance sought permission to launch spot exchange-traded funds on the token in the US, fueling optimism about digital assets gaining more mass-market appeal.  The largest cryptocurrency rose as much as 3.4% to $31,504 on Thursday, the highest level since June 8 last year. Bitcoin has surged 90% this year, with gains in the past few weeks spurred by renewed speculation that an ETF that invests directly in the cryptoasset will eventually be approved in the US. Thursday’s advance was broad, with other major tokens like Ether rising even as equity markets slumped around the world. Bitcoin is now back at levels last seen before the collapse of crypto hedge fund Three Arrows Capital rocked markets and touched off a daisy chain of defaults.
  • Once one of the highest-rated stocks on Wall Street, Alphabet Inc. is getting a cooler reception from analysts after rallying 38% this year. The Internet search giant has 47 buy ratings, the lowest in at least three years, among the 55 analysts tracked by Bloomberg that cover it. While that still reflects more optimism than many other companies in the Nasdaq 100, it’s well below the unanimous approval Alphabet had a year ago, showing that some analysts believe its rebound from a November low is running out of steam. “I see some short-term headwinds here after the most recent price movement,” David Wagner, portfolio manager at Aptus Capital Advisors LLC, said in an interview. He sees Microsoft Corp. increasingly threatening Google’s dominant market share in search.