June 5, 2023

Daily Market Commentary

Canadian Headlines

  • Canada is staking billions of dollars of public money on an oil industry plan to transform one of the world’s dirtiest crudes into one of the cleanest. But it’s relying on a technology with a checkered track record to prolong the life of a business critics say belongs in the history books. The tar that infuses the sands in Canada’s remote northwest is so sticky the region’s indigenous people traditionally used it to waterproof their canoes. It wasn’t much use for anything else until the 1960s, when the oil company that became Suncor Energy Inc. found a way to refine the bitumen into crude oil that could be sold on the global market. Today, Canada is the world’s fourth largest oil producer, but the amount of energy it takes to extract and process oil-sands barrels makes many of the region’s grades among the most polluting crudes of all. A grade called Canadian Cold Lake, for instance, released 81.87 kilograms of planet-warming carbon dioxide for every barrel produced in July 2021 — four times the emissions for a barrel from Saudi Arabia’s Ghawar field.

World Headlines

  • European stocks were little changed in early trading after a slew of European economic activity data left markets unmoved. Energy stocks outperformed as crude oil rallied on Saudi Arabia’s pledge to make output cuts in July. The commodity-heavy FTSE 100 Index rose 0.5%, while other major country indexes were flat to slightly lower. Telecoms lead gains as shares of Deutsche Telekom AG and other operators rose, bouncing back from Friday’s selloff after Bloomberg News reported that Amazon is planning to provide low-cost mobile phone service to Prime members in the US. The Stoxx Europe 600 energy sub-index climbed 1.1%. Among single stocks, Viaplay Group AB slumped after it slashed forecasts and replaced its CEO. UBS Group AG shares ticked higher as it expects to complete its acquisition of Credit Suisse Group AG as early as June 12.
  • US stock futures fluctuated after last week’s sharp rally, which took the S&P 500 to the brink of a bull market. Apple Inc. rose 0.6% in premarket trading, putting the shares on track to reach a new record high. The company is expected to launch a mixed-reality headset at the Worldwide Developers Conference on Monday, marking its most significant product launch in nearly a decade. Treasury yields rose across the curve, while the dollar strengthened against all its Group-of-10 peers. There’s increasing speculation that the Federal Reserve plans to keep interest rates steady in June, but keep options open for later hikes. Reports on US services and factory orders due later today may provide further clues on the health of the economy.
  • Asian equities gained for a third day, led by Japanese stocks, as easing global-recession concerns and the potential for a pause in Federal Reserve rate hikes fueled risk-on sentiment in the region. The MSCI Asia Pacific Index rose 0.6%, driven by gains in the industrial and financial sectors. Australia and Hong Kong were the best performers after Japan, while benchmarks also advanced in Singapore. A key gauge of mainland China shares dropped. Malaysia, Thailand and New Zealand were closed for holidays. The advance in Asia follows a US rally Friday amid bets that a mixed jobs report will encourage the Fed to leave rates on hold next week. Over the weekend, President Joe Biden signed legislation averting a US debt default, which could have been a catastrophic blow to the world’s largest economy.
  • Oil advanced at the week’s open after Saudi Arabia pledged to shave an extra 1 million barrels-a-day from its production in July, taking output to the lowest level in years in an effort to stabilize the market. West Texas Intermediate jumped almost 5% early in the session before paring gains to trade around $73 a barrel with similar directional moves for international marker Brent. Saudi Energy Minister Prince Abdulaziz bin Salman said he would do “whatever is necessary to bring stability to this market,” following a tense OPEC+ meeting over the weekend. Oil in New York tumbled 11% last month as demand concerns, especially in China, sapped confidence. Most market watchers had expected OPEC+ to keep output unchanged, including Goldman Sachs Group Inc., whose analysts forecast major producers holding steady. The outcome was “moderately bullish,” the bank said after the gathering in Vienna.
  • Gold edged lower after Friday’s decline as the US resolved its debt-default saga, quelling demand for the haven metal. After hailing the budget agreement that averted a first-ever US debt default, President Joe Biden said the world wouldn’t be shaken by doubts about the creditworthiness of the top economy. The dollar and Treasury yields ticked higher on Monday, putting pressure on gold. The metal has slid almost 6% from a peak in early May as US data indicated the economy is holding up well, giving the Federal Reserve room to tighten monetary policy further. Few traders see a hike at its meeting this month, though several officials have said their could be more tightening later this year. Spot gold declined 0.3% to $1,942.20 an ounce as of 9:28 a.m. in London, after closing Friday down 1.5%. The Bloomberg Dollar Spot Index edged up 0.2%. Silver fell, platinum steadied and palladium rose.
  • Investors withdrew money from exchange-traded funds that buy emerging market stocks and bonds last week. This was the fifth straight week of outflows. Outflows from U.S.-listed emerging market ETFs that invest across developing nations as well as those that target specific countries totaled $1.07 billion in the week ended June 2, compared with losses of $5.94 million in the previous week, according to data compiled by Bloomberg. So far this year, inflows have totalled $7.4 billion.
  • Large US banks may face a 20% average increase in capital requirements from upcoming rule proposals as the collapse of several smaller lenders this year adds urgency to a push to bolster the industry’s financial strength, according to the Wall Street Journal. The revised requirements could be proposed as early as June, and the specific increases will depend on lenders’ activities, according to the report, citing people the newspaper didn’t identify. Institutions with large trading businesses would take the biggest hit while those heavily dependent on fee income could also face significant increases, the report said. Banking regulators around the world are tightening capital rules for the industry as they seek to wrap up the final chapter of their response to the financial crisis of 2008. The collapse of several banks in the US earlier this year served as a reminder of the fallout from weak lenders, while the biggest firms argue that capital rules going too far would hinder economic growth.
  • Apple Inc. is on pace to close at a record high ahead of its most significant product launch event in nearly a decade, after benefiting from a broader rotation back into technology stocks. Shares of the iPhone maker rose as much as 0.6% to $182.09 on Monday in premarket trading, above the closing high reached on Jan. 3, 2022. The gain would extend Apple’s year-to-date rally of 39%, a remarkable turnaround for a stock that sank to a 19-month low in the first trading days of the year. The stock has risen consistently throughout 2023, with investors viewing it as a safe haven in periods of economic risk or uncertainty given the strength of its balance sheet, its capital-return program, and its durable revenue streams. In addition, its recent results topped expectations, thanks to a rebound in its iPhone and growth in its Services business.
  • The Federal Reserve’s June meeting is shaping up to be one of the trickiest in its 15-month campaign to tame inflation: Chair Jerome Powell seems intent on skipping an interest-rate increase, while explaining to the public that officials aren’t done yet. Since March 2022, the US central bank has raised its policy rate at 10 consecutive meetings, to a range of 5% to 5.25%, with the last two increases following bank runs that led to the collapse of four lenders. Now, Powell and several of his colleagues want to take a break at their June 13-14 meeting to assess the outlook, even though their quarterly economic forecasts may show interest rates and inflation moving higher this year than they expected three months ago.
  • BlackRock Inc. and other large money managers are dipping back into the UK’s battered debt market, lured by one of the highest yields in the developed world. BlackRock last week ditched a long-held underweight position in gilts, saying market expectations for more Bank of England interest-rate hikes were overdone, and enough to trigger a “severe recession.” Legal & General Investment Management has added to tactical exposure, while Pictet Wealth Management said it likes the securities. “UK gilts have become increasingly attractive for foreign investors,” said Laureline Renaud-Chatelain, a fixed-income strategist at Pictet Wealth Management. “They offer the highest yields in the core sovereign bond space, even once hedging costs are taken into account.”
  • China said local government debt is manageable and authorities have enough financial resources to avoid risks from spreading, seeking to allay investor fears of possible defaults. The official Xinhua News agency published a report Monday responding to recent concerns about local government finances. It quoted an unidentified official from the Ministry of Finance as saying government finances are generally healthy and urged local authorities to tackle their debts. The current challenge is that “the distribution of local government debt is unbalanced, with some regions exposed to relatively high risks and under rather big principal and interest payment pressure,” the official said in the Xinhua report.
  • UBS Group AG expects to complete its acquisition of Credit Suisse Group AG as early as June 12, creating a new powerhouse in European banking and ending weeks of uncertainty for the lenders’ more than 100,000 employees. The closing of the deal is still subject to certain conditions, including some that UBS said it could waive, according to a statement Monday. Upon completion, Credit Suisse shares will be delisted from the Swiss SIX Stock Exchange on June 13 and the New York Stock Exchange on June 12.  Shareholders of Credit Suisse will receive one UBS share for every 22.8 outstanding shares held. All of Credit Suisse’s outstanding debt securities will become obligations of UBS.
  • President Joe Biden’s signature of legislation suspending the federal debt ceiling has given the Treasury Department the green light to resume net new debt issuance after months of disruption. Ever since mid-January, when it hit the $31.4 trillion debt ceiling, the Treasury has been using special accounting measures to maintain payments on all federal obligations. There were just $33 billion of those left available as of May 31. It’s also been running down its cash balance, which dropped below $23 billion on June 1 — a level seen by experts as dangerously low given the volatility in day-to-day federal revenues and payments.
  • KKR will acquire all outstanding shares of Circor common stock for $49 per share in cash, representing a 55% premium to the company’s closing stock price on June 2, 2023. Circor will be a privately held company wholly owned by KKR’s investment funds and will no longer have its common stock listed on any public market once the transaction is complete.
  • ESG strategies have contributed to a serious decline in energy investments by focusing too much on divestment from fossil fuels and not enough on investment in renewable power sources, according to a senior researcher at Goldman Sachs Group Inc. “The focus on decarbonization is correct, but I think it needs to be driven by more investment, not divestment,” Michele Della Vigna, Goldman’s head of natural resources research, said in an interview. “The key is to move away from divesting oil and gas towards more investment in renewables and in low carbon.”