July 8, 2022

Daily Market Commentary

Canadian Headlines

• Germany expects Canada to release a key Russian pipeline part caught up in sanctions, a move that both Berlin and Moscow have said could ease the squeeze on gas flows to Europe. According to a person familiar with the situation, Germany expects Canada to send the turbine back soon. A German government spokesman told reporters on Friday there are “positive signals from Canada,” though he couldn’t confirm the part was on its way yet. Releasing the turbine could potentially de-escalate the gas standoff between Russia and Germany –and help increase flows that have been drastically curbed for weeks. German Economy Minister Robert Habeck has been pleading with Canada to do so as he tries to avert the prospect of energy rationing in Europe’s largest economy this winter.

World Headlines

• European equities advanced, adding to two strong days of gains as investors prepared for an earnings season that will offer insight into corporate resilience amid a flurry of headwinds. The Stoxx Europe 600 Index was 0.5% higher by 11:39 a.m. in London. Autos outperformed the most, with construction and chemicals also among the leading advancers. Miners were the biggest laggards. European shares are poised for a weekly gain as the cooling of commodities prices has brought some relief to widespread inflation fears. Investors will be closely monitoring the upcoming earnings season for signs of whether companies have been able to overcome risks ranging from the war in Ukraine to high inflation and rising interest rates.
• US stock-index futures slid as investors awaited employment data to gauge whether the world’s largest economy can avoid a recession. The dollar found haven demand. Contracts on the S&P 500 and Nasdaq 100 gauges fell at least 0.1% each, signaling US stocks will pare weekly gains. Treasuries rose, with the 10-year yield shedding 1 basis point. The Bloomberg Commodity Index headed for the longest streak of weekly losses since March 2020. Twitter Inc. fell in premarket New York trading after a report Elon Musk’s proposed acquisition of Twitter Inc. may fall apart. Global markets are repositioning for the possibility of a US recession as the Federal Reserve delivers successive rate hikes to tame elevated inflation. Two of the Fed’s most hawkish policy makersbacked raising interest rates another 75 basis points this month, while playing down recession fears. Investors suspended their judgment on the question, keeping portions of the US yield curve inverted and awaiting Friday’s nonfarm payrolls report.
• Shares in Asia Pacific climbed as speculation about stimulus in China and commentary from Federal Reserve officials soothed investor concerns about a slowdown in global growth. The MSCI Asia Pacific Index added as much as 1.1%, led higher by tech and material shares, amid reports that China could allow 1.5 trillion yuan of bond sales by local governments.  Tech-heavy markets such as South Korea and Taiwan led the region’s advance, while Japan shares trimmed their advance after reports that former Prime Minister Shinzo Abe was shot during a campaign event. Abe later died, NHK reported. The MSCI Asia gauge is poised for a weekly gain of about 1.3% as chip shares rebounded, helped by better-than-expected sales at Samsung Electronics. Still, the Asia tech gauge’s advance has lagged the Nasdaq 100’s climb this week as worries remain about the region’s growth outlook.
• Oil is set for a weekly loss after choppy trading in which concerns over a demand-sapping slump clashed with signals of tight supply. West Texas Intermediate was near $102 a barrel, putting the US benchmark on course for a weekly fall of more than 5%. Prices have swung in a range of more than $16 this week — the biggest since March — which saw both WTI and Brent briefly drop below $100. Investors remain concerned that restrictive US monetary policy could herald a recession, and oil has been dragged lower alongside other commodities. Two of the Federal Reserve’s most hawkish policy makers, Christopher Waller and James Bullard, backed raising interest rates by another 75 basis points this month to curb red-hot inflation, while also playing down concerns of a slump.
• Gold is set for a fourth straight weekly drop — the longest such stretch since May — as traders weighed the outlook for further monetary policy tightening and the impact on growth. Bullion is trading near the lowest level in more than nine months as the US dollar strengthened on demand for havens on the back of growing fears of an economic downturn. The greenback was also bolstered amid unease in markets after the shooting of former Japanese Prime Minister Shinzo Abe on Friday. Abe, 67, was unresponsive after being shot during a campaign event. Meanwhile, on Thursday, two of the Federal Reserve’s most hawkish policy makers backed raising interest rates another 75 basis points this month to curb inflation, while playing down fears the US economy was headed for recession.
• Price swings in the energy markets have never been greater, but there is more to come and stabilizing measures are needed, according to Sweden’s energy minister. Russia’s war in Ukraine has roiled the markets and propelled prices for everything from electricity to natural gas and coal to records. The volatility and uncertainty over gas supplies are threatening an energy system and markets that have been built up over decades. “No government can completely remove those effects, but we are taking measures to alleviate the situation,” Energy Minister Khashayar Farmanbar said in an interview. “We don’t see any risk that there will be a lack of energy in the near term, but we will get an impact on prices. We have tried to take a number of measures to address that.”
• Treasury Secretary Janet Yellen is heading out on her first trip to Asia since taking office, aiming to use sit-downs with global counterparts to help build momentum for a complex effort to cap prices for Russian oil. Yellen, who previously traveled to the region as Federal Reserve chair, departs Saturday on a 10-day trip that includes stops in Tokyo and Seoul. In between, she’ll attend the Group of 20 finance ministers gathering in Bali, Indonesia, July 15-16. The trip poses a fresh economic-diplomacy challenge for the Treasury chief, who led talks last year on a global corporate-tax deal — though one that’s now proving a struggle to complete. Group of Seven leaders last week instructed their ministers to explore the Russia oil-price-cap plan favored by the US, putting Yellen’s role in the spotlight.
• GameStop Corp. fired Chief Financial Officer Mike Recupero and is cutting jobs in a bid to turn around a business buffeted by shifting gaming demands and market malaise. The shares sank 6.8% in pre-market trading on Friday. Diana Jajeh, the current chief accounting officer, will replace Recupero, effective immediately, GameStop said Thursday in a securities filing. Recupero isn’t entitled to any severance payments beyond what is outlined in his offer letter from the company, according to the filing. Ryan Cohen, who joined the board and became chairman last year, has been trying to revive growth at beleaguered GameStop, which has slowed as gamers shifted from buying game discs to digital downloads. During the pandemic, GameStop became emblematic of the so-called meme-stock craze whereby retail traders bid up the price of certain companies, prompted by chatter on Reddit and other social media, rather than business fundamentals.
• Investors are hoarding cash and hiding in US Treasuries as they dump equities amid fears that the US economy is headed for a recession. Nearly $63 billion flowed into cash in the week through July 6, while global equity funds had redemptions of $4.6 billion, according to Bank of America Corp. note citing EPFR Global data. US stock funds still saw their second week of additions, while global bonds had their biggest inflows in 14 weeks at $2.4 billion thanks to the buying of Treasuries and government debt, Bank of America said.  Hartnett said the S&P 500 was likely to be range-bound at 3,800-4,200 this summer rather than seeing a continued rebound. “Bear markets end with a recession or an event that causes Fed to reverse policy; we say bear market in summer hiatus, and bear ain’t over and Big Low has yet to be reached,” the strategist wrote.
• Global food prices dropped from near a record amid prospects for fresh supplies and fears about a recession, potentially offering some respite to strained households. A United Nations index of world food costs slipped 2.3% last month. While it will take time to filter through to grocery stores, it could be good news for consumers who are also being squeezed by high prices of everything from energy to motor fuel to clothing. Food prices had already climbed during the pandemic, and spiked even higher after the start of the war in Ukraine stifled grain exports from the country known as the breadbasket of Europe. But agricultural prices have eased lately as Northern Hemisphere harvests start and worries about an economic slowdown weigh on commodities.
• Two of Europe’s biggest airlines announced another round of cancellations, adding to the disruption turning the travel sector’s pandemic recovery summer into a nightmare. The Dutch arm of Air France-KLM plans to cancel as many as 20 round-trip flights to European destinations every day through the end of August. Deutsche Lufthansa AG said it will cancel several hundred flights next week. The European aviation industry has suffered unprecedented bottlenecks and long check-in lines at airports from London Heathrow to Brussels to Dusseldorf, Germany. The disruptions have been brought on by labor disputes, staffing shortages and cost cuts during the pandemic that are now coming back to haunt airlines, just as travel roars back for the busy summer period.
• The European Central Bank’s first major climate stress test shows banks facing a hit of 70 billion euros ($71 billion) from increasing natural disasters and sweeping changes across industries. The figure totals credit and market losses in the worst scenario, which includes droughts, heat and floods, the ECB said on Friday in Frankfurt. It cautioned that the result “significantly understates” actual risks related to global warming, partly because climate shocks weren’t accompanied by a broader economic downturns and limited to specific portfolios. The ECB also found that 60% of banks don’t yet have a climate risk stress-testing framework. Most lenders don’t include climate risk in their credit-risk models, and just one in five consider it as a variable when granting loans.
• Boris Johnson is set to stay on as caretaker prime minister following his resignation on Thursday, and betting firms are readying themselves for the race to succeed him. Conservatives organizing the leadership contest are keen to whittle down candidates to a final two before Parliament goes on its summer recess on July 21. Gambling websites offer clues about what happens next, as potential successors prepare to throw their hats in the ring. The process, which could take six weeks or more depending on how many candidates receive the backing of parliamentary colleagues, involves a series of ballots, resulting in two contenders to be put to the wider party. There would then be an August campaign, with candidates using television debates and hustings around the country to win the votes of the membership, thought to be about 180,000 strong.  If, however, only one candidate is nominated by MPs, then they become uncontested leader but may be subject to a vote of party members to ratify the result.
• The UK’s antitrust watchdog began an in-depth review into the nation’s soaring petrol prices that have helped to fan the fastest rate of inflation in a generation after concerns were found in some parts of the sector. The Competition and Markets Authority said it was worried about what it called the refining spread — a growing gap between the cost of crude oil and wholesale petrol and diesel. It said the spread ballooned because oil refineries closed around the world during Covid and there wasn’t enough fuelmaking capacity when demand rebounded from the virus. Petrol prices are at an all time high across the world, in part because of a refining bottleneck but also in the wake of Russia’s invasion of Ukraine and the disruption it caused across oil markets. That said, UK retailers have recently been criticized for not passing on declines in the wholesale petrol market, and the CMA commented that the “retailer spread” has widened in in the past few weeks.
• UK judges paved the way for a group of more than 200,000 people to bring a suit against BHP Group Ltd. over its role in the deadly collapse of a mining dam in Brazil. The appeal judges overturned a lower court ruling blocking it from taking place in the UK, saying the trial could provide “a real and legitimate” advantage to the claimants. The group was pushing to sue the mining giant in the UK, seeking at least $7 billion in damages in what would be one of the biggest class actions in the country’s history. The Fundão Dam collapsed in 2015, unleashing a torrent of mud filled with toxic mine waste and killing 19 people in Mariana, Minas Gerais. The flood destroyed entire villages, polluted rivers and devastated natural habitats.
• The US is expected to press the case at a G-20 meeting in Bali that Russia’s military actions set a dangerous precedent as it works with its partners to prevent the attendance of the top Kremlin’s diplomat from subverting the gathering’s agenda. Russian Foreign Minister Sergei Lavrov met Chinese counterpart Wang Yi on the sidelines of the Group of 20 ministerial meeting, where they spoke about the solidarity of the long-time partners. A Biden administration official earlier this week urged Beijing to stop spreading Russian “lies” about the Kremlin’s invasion of its neighbor. President Volodymyr Zelenskiy said he’s confident UK policy toward Ukraine won’t change any time soon, after Boris Johnson announced his intention to resign as prime minister.
• Shinzo Abe, the 67-year old former prime minister fatally shot on Friday, built a legacy during a record-breaking tenure as a foreign policy hawk, but will likely be most remembered for an aggressive economic-growth strategy that bore his name. Abe died in a hospital hours after being shot during a campaign event for the ruling Liberal Democratic Party in Nara, western Japan, Finance Minister Shunichi Suzuki said. The death was confirmed by a doctor during a hospital press conference. When he came to office for the second time in 2012, Abe launched an unprecedented effort to revive Japan’s flagging economy — what became known as “Abenomics” — based on a surge of monetary easing and government spending. Its success propelled his LDP to six straight election wins, making Abe the country’s longest-serving prime minister, with more than 2,800 consecutive days in office.
• Tesla Inc. monthly shipments of China-made vehicles rebounded to record in June, a stunning recovery after restrictions to stop the spread of Covid in Shanghai knee-capped the carmaker’s factory in the financial hub.  The US electric vehicle pioneer delivered 78,906 vehicles last month, well over double the 33,155 in the same period a year ago, data from China’s Passenger Car Association showed Friday. An unprecedented 77,938 of the EVs made in June went into the local market, while just 968 were shipped abroad. Tesla’s monthly deliveries from China sunk to as low as 1,512 units in April, with zero exports as Shanghai’s lockdown forced the company to suspend production for around three weeks.
• Bitcoin is on course for its best weekly gain since October last year, helped by a return of risk appetite in global markets more broadly. The largest cryptocurrency by market capitalization was up more than 13% for the week so far as of 10:33 a.m. on Friday in London. It gave up some gains after briefly trading above $22,000, as news of the killing of former Japanese Prime Minister Shinzo Abe triggered a stock market retreat.  Other tokens like Ether, Avalanche and Solana have also had a strong run in recent days, helping to take the overall market value of cryptocurrencies back close to $1 trillion, according to CoinGecko data.
• Elon Musk’s proposed acquisition of Twitter Inc. may fall apart over his doubts that the company is accurately reporting the number of spam bots on the service, according to a report, even as company executives reiterated the number is low and tried to better explain how they calculate the figures. Twitter has repeatedly said that spam bots represent less than 5% of its total user base. Musk, meanwhile, has complained that the number is much higher, and has threatened to walk away from his agreement to buy the company for $44 billion until he gets confirmation about Twitter’s bot percentage.  Musk’s team has concluded that Twitter can’t verify its figures on the spam accounts and has “stopped engaging” in discussions around funding the deal, the Washington Post reported Thursday, citing people familiar with the matter. This issue has put the acquisition by the Tesla chief executive officer “in serious jeopardy,” the newspaper said, citing the people.
• BMW AG said sales declined nearly 20% in the second quarter even as electric-vehicle deliveries surged in the same period.  The Munich-based carmaker said Friday its sales dropped to about 563,536 BMW, Mini and Rolls Royce vehicles, including a 28% decline in China. In Europe and the US, sales fell by about one-fifth. Despite the overall drop, deliveries of electric vehicles more than doubled in the first half of the year, compared to 2021. BMW said it’s on course to meet its target of doubling EV sales this year.
• Spirit Airlines Inc. delayed for a third time a crucial shareholder vote so it can continue discussions of its merger options with Frontier Group Holdings Inc. and rival suitor JetBlue Airways Corp. The special meeting that had been set for Friday was delayed until July 15, Spirit said in a statement Thursday. While Spirit will continue to solicit shareholder proxies, there won’t be a vote or other business conducted at Friday’s meeting. The company said “it intends to reopen and immediately adjourn” the meeting. The additional delay could signal that Spirit doesn’t have sufficient shareholder support to move ahead with a vote on the agreement it reached in February with Frontier. Spirit has rejected five takeover proposals from JetBlue, which is offering $3.7 billion in cash. Frontier’s last updated offer was for stock and cash valued at $2.6 billion.

CALENDAR

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

*All sources from Bloomberg unless otherwise specified