June 6, 2022

Daily Market Commentary

Canadian Headlines

  • Dubai is selling stakes in some of its most prized assets, including the port that helped transform the city into a global trade hub, to a Canadian fund as the emirate seeks to alleviate its debt burden. Caisse de Depot et Placement du Quebec agreed to invest $5 billion in the Middle East’s biggest port and two industrial zones, according to a statement. Other long-term investors will have the opportunity to acquire additional stakes for up to $3 billion by the end of the year. Under the agreement, the Montreal-based pension manager will invest $2.5 billion in the Jebel Ali Port, the Jebel Ali Free Zone and the National Industries Park through a new joint venture in which it will hold a stake of about 22%, with the remainder of the transaction being financed by debt.

World Headlines

  • European equities rebounded from last week’s declines after China eased Covid-19 curbs, fueling risk-on sentiment. The Stoxx Europe 600 rose 0.9% at 10:25 a.m. in London as a loosening of restrictions in Beijing increased bets that economic activity will pick up. Commodity-tied stocks jumped with oil and metals, while technology shares advanced with peers in Asia and the US. The FTSE 100 gained 1.4% after UK markets resumed trading following a holiday, even as Boris Johnson faces a leadership vote in his ruling Conservative Party. Hawkish central banks, soaring inflation and the war in Ukraine are among a wall of worries that have pressured European stocks this year. Investors are now awaiting the European Central Bank’s meeting on Thursday when it’ll announce an end to bond purchases and formally begin the countdown to an increase in borrowing costs in July.
  • US equity-index futures gained on Monday as Beijing’s latest move to ease Covid restrictions injected a note of optimism into markets rattled by inflation and rate-hike concerns. Treasuries and the dollar slipped. Contracts on the tech-heavy Nasdaq 100 and the S&P 500 climbed more than 1%, buoyed by a report that Chinese regulators are set to ease curbs on ride-hailing giant Didi Global Inc. and other US-listed tech firms. Didi’s shares soared as much as 52% in premarket trading. Other tech giants caught the mood: Apple Inc. climbed 1.6%, Tesla rose after tumbling over 9% by the close on Friday, while Amazon.com Inc. edged higher after implementing a 20-for-1 stock split. Stronger-than-forecast US hiring data for May suggested the Federal Reserve won’t waver from its tightening path to rein in price pressures. But Goldman Sachs Group Inc. economists said the Fed may be able to pull off its aggressive rate-hike plan without tipping the country into recession. The easing of Chinese lockdowns will help abate supply-chain pressures, said Diana Mousina, a senior economist at AMP Capital.
  • Asian stocks climbed, supported by a rally in Chinese tech shares and positive sentiment following Beijing’s economic reopening. The MSCI Asia Pacific index rose 0.6% as Hong Kong-listed internet names jumped after a report that authorities are wrapping up their probe into Didi Global. Hong Kong and Chinese shares were among the top gainers in the region, also helped by Beijing moving closer to returning to normal as it rolled back Covid-19 restrictions. Japanese shares were higher, with transportation and restaurant stocks gaining after the Nikkei reported the government is considering restarting the “Go To” domestic travel subsidy campaign as soon as this month.
  • Oil climbed after Saudi Arabia signaled confidence in demand with a bigger-than-expected price increase of its crude for Asia. West Texas Intermediate traded near $120 a barrel after earlier rising to the highest level in almost three months. Saudi Arabia boosted its official selling prices for Asian customers in July as China — the world’s top crude importer — cautiously emerges from virus lockdowns that have strained its economy. Oil has rallied almost 60% this year as rebounding demand from economies recovering from the pandemic coincided with a tightening market after Russia’s invasion of Ukraine. The war has fanned inflation, driving up the cost of food to fuels and prompted aggressive monetary tightening from central banks.
  • Gold steadied after dropping last week, when data showed the US economy remaining robust in the face of higher interest rates. Bullion is maintaining support near $1,850 an ounce but has slipped about 10% since peaking in March during the early stages of Russia’s invasion of Ukraine. Investors are focusing on whether the Federal Reserve’s rate hikes to control decades-high inflation will lead to a recession in the world’s largest economy.  Last week, data showed that US employers hired at a healthy pace in May while wage gains held firm, suggesting the economy continues to strengthen even as financial conditions tighten. Gold subsequently slid 0.9% as the dollar strengthened.
  • Copper rallied past $9,800 a ton to the highest since April, with sentiment across industrial metals bolstered by the latest signs of China easing tough measures to fight Covid-19. In Beijing, authorities allowed public transport to restart in most areas, and let offices and restaurants reopen. Single-digit case counts in the capital and in Shanghai on Sunday also pointed to relief from the curbs that have taken a huge toll on the economy and depressed demand for metals. Copper has had a roller-coaster year, hitting a record high in March as commodities spiked in the wake of Russia’s invasion of Ukraine. It then slid to a seven-month low in May on fears over global growth and China’s Covid battle.
  • President Joe Biden will take executive action to boost the US solar sector, seeking to revive clean energy projects stalled by a trade dispute and bolster domestic manufacturing so the nation’s climate efforts are less reliant on foreign suppliers. Biden plans to invoke the Defense Production Act to provide support for US-made solar panels, said people familiar with the matter, who asked for anonymity to discuss private details before a public announcement expected as soon as Monday. At the same time, the president is set to announce a two-year halt in new solar tariffs, which would allow domestic project developers to continue using foreign-made equipment while US manufacturing ramps up, two of the people said.
  • With half-point interest-rate increases all but certain in June and July, Federal Reserve officials are shifting the focus away from a destination on hikes to something that’s trickier to determine and explain: the broader impact of their policies on the economy. At the start of the hiking cycle, Chair Jerome Powell said the goal was “getting rates back up to more neutral levels as quickly as we practicably can.” In May, however, he walked back from the concept of neutral — a level that neither slows nor speeds up growth — cautioning that the discussion had a “sort of false precision.” Officials want to cool demand by tightening financial conditions. They don’t know with any precision how raising rates combined with a shrinking balance sheet crimps spending. It’s also hard to explain a financial conditions goal, though there are several indexes that try to boil down an array of market prices into a single gauge.
  • Investors added money to exchange-traded funds that buy emerging market stocks and bonds last week. This was the third 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 $167.5 million in the week ended June 3, compared with gains of $1.73 billion in the previous week, according to data compiled by Bloomberg. So far this year, inflows have totalled $22 billion.
  • Weakening corporate profit forecasts may provide the latest headwind to US stocks, which are likely to fall further before bottoming during the second-quarter earnings season, according to Morgan Stanley strategists. “In the absence of an obvious shock like a recession, companies are slow to guide down,” strategists led by Michael Wilson wrote in a note on Monday. “This time should be no different, which means stocks can hang around current levels until the second-quarter earnings season when the next leg lower is likely to begin and end.” Wilson has been among Wall Street’s most prominent bears and correctly predicted the latest market selloff, which was fueled by worries that a hawkish Federal Reserve would tip the economy into a recession. A strong jobs report on Friday further fanned those concerns and led the S&P 500 to its eighth weekly decline in nine.
  • JetBlue Airways Corp. improved its offer for Spirit Airlines Inc., boosting a breakup provision to $350 million and adding an upfront cash payment just days before shareholders will vote on a pending buyout agreement with Frontier Group Holdings Inc. The revised offer increases JetBlue’s reverse breakup fee by $150 million and provides for about $164 million payable as a cash dividend “promptly following” a vote approving a combination of the carriers, the airline said in a statement Monday. The update comes after Frontier sweetened its own agreement by adding a key $250 million fee payable to Spirit if their accord breaks up on antitrust grounds. JetBlue is aiming to build more support among Spirit shareholders for its higher, all-cash offer ahead of a June 10 vote. It needs them to vote against Frontier’s stock-and-cash deal, initially valued at $2.9 billion, to preserve its best chance for a quick infusion of growth that will help it compete against larger US carriers. Spirit rejected JetBlue’s initial $3.6 billion offer, prompting a subsequent $3.3 billion hostile tender bid.
  • Contracts on the tech-heavy Nasdaq 100 gained after the underlying index erased more than $400 billion in market value on Friday amid renewed concerns about tightening monetary policy.  Nasdaq 100 futures climbed 1.5% at 4:32 a.m. in New York as Beijing rolledback Covid-19 restrictions, boosting global risk appetite. A Wall Street Journal report, which said China is preparing to conclude its probe on Didi Global Inc., boosted sentiment even further. S&P 500 and Dow Jones futures also jumped.
  • Elon Musk sent Tesla Inc. staff, investors and electric-car watchers on a roller-coaster ride with conflicting messages about potential job cuts, underlining the sometimes erratic nature of his leadership and muddying the automaker’s outlook. The chief executive officer tweeted on Saturday that Tesla’s total workforce will increase over the next 12 months, with its salaried ranks remaining relatively unchanged. That followed his Friday message to employees that 10% of salaried workers would lose their jobs, which clarified an earlier memo that suggested cuts would be made across the company. According to people who received the second email, Musk said that while Tesla is overstaffed in some areas, cuts won’t apply to people who assemble cars or battery packs.
  • Ferrovial SA, the operator of London’s Heathrow airport, agreed with the Carlyle Group Inc. to buy a stake in the entity developing Terminal 1 at John F. Kennedy International Airport in New York. The Spanish infrastructure firm will acquire 96% of the company through which The Carlyle Global Infrastructure Fund holds a 51% stake in the concessionaire appointed to design, build and operate the terminal until 2060, Madrid-based Ferrovial said in a regulatory filingon Monday. Ferrovial said it will invest $1.14 billion. The revamp will involve $9.5 billion in total financing, New York Governor Kathy Hochul said in December. The plan is to create a new Terminal 1 on the current site of the airport’s terminals 1, 2, and 3.
  • Goldman Sachs Group Inc. economists say the US economy is still on a narrow path to a soft landing as improving inflation figures and other factors suggest the Federal Reserve may be able to pull off its aggressive interest rate hike plan without tipping the country into recession. Economists led by Jan Hatzius said that while there’s some signs of softening in the labor market, sequential core inflation appears to be slowing as pressures on the supply chain improve.  The better inflation numbers, along with some adjustments to the jobs market, have reduced the risk that the Federal Reserve will have to tighten monetary policy to a degree that will force a recession in the coming years, they added.
  • Russian car sales plunged 84% in May, as sanctions and international isolation brought an industry that had once been a showcase for foreign investment to a near standstill. Fewer than 25,000 vehicles were sold last month, according to the Association of European Businesses, the lowest since at least 2006 and less than a tenth of the monthly levels seen in peak months in the past. President Vladimir Putin’s Feb. 24 invasion of Ukraine spurred a wave of sanctions from the US and its allies, as well as disruptions of supplies from a broader range of countries. The isolation hit the foreign-dominated auto sector especially hard, with the exodus of overseas producers worsened by the industry’s heavy dependence on imported components.
  • India is looking to double down on its Russian oil imports with state-owned refiners eager to take more heavily-discounted supplies from Rosneft PJSC as international players turn down dealings with Moscow over its invasion of Ukraine.  State processors are collectively working on finalizing and securing new six-month supply contracts for Russian crude to India, said people with knowledge of the companies’ procurement plans. Cargoes are being sought on a delivered basis from Rosneft, with the seller set to handle shipping and insurance matters, they said.  These supply agreements, if concluded, will be separate and on top of shipments that India already buys from Russia via other deals. Details on volumes and pricing are still being negotiated with Indian banks set to fully finance all cargoes, said the people who asked not to be identified as discussions are confidential. Indian refiners will increasingly procuring directly from Russian companies such as Rosneft as top international traders such as Glencore Plc wind up their dealings, they added.
  • Boris Johnson will face a leadership vote in his ruling Conservative Party, after a series of missteps and scandals became too much for scores of Tory Members of Parliament. Senior Conservative MP Graham Brady said Monday the threshold of at least 54 MPs — 15% of the Conservative total — has been met to trigger a confidence vote in Johnson, who became the first sitting prime minister found to have broken the law earlier this year. Some MPs had requested holding off until after weekend celebrations marking Queen Elizabeth II’s 70 years on the throne. The secret ballot will be held for two hours from 6 p.m., with a result shortly afterward.
  • Starbucks Corp. is considering only external candidates for its next chief executive officer, as interim CEO Howard Schultz said the company needs to add new talent and skills to its senior leadership ranks. Mr. Schultz — who said he isn’t a candidate to hold the position permanently — said Starbucks has recently talked to several promising CEO prospects, and that the company aims to identify a new chief executive by the fall. He said he plans to leave the coffee giant’s C-suite by the shareholder meeting in March. Mr. Schultz returned in April to succeed Kevin Johnson on an interim basis, his third stint running the company that he built from a local Seattle coffee-shop chain into a global giant. Mr. Schultz said Mr. Johnson was a good CEO for the company but that he hasn’t reached out to him upon returning.
  • Stock splits were all the rage early this year as indexes hovered near record highs, with companies from Amazon.com Inc. to Alphabet Inc. announcing them to make their share prices more alluring to individual investors. A few months on, the market has taken care of the problem.  Amazon, whose 20-for-1 split takes effect Monday, is among companies whose stocks have tumbled since the moves were announced amid a broad market selloff that’s been especially painful for the technology sector. Shares of the e-commerce giant have fallen 12% since reporting the plan in March. Alphabet, which announced a similar proposal in February, is down 17% since then. The selloff means the stocks will be trading at a discount to the sticker price originally envisioned by executives. That will make it easier for the behemoths to gain entry to the Dow Jones Industrial Average, whose weighting is based on share price, but it could have the effect of making them look less princely than their massive market values and history of big gains would imply.
  • Bitcoin is continuing to advance and stabilize, rising above the $31,000 mark, after languishing over the weekend with the largest cryptocurrency gaining as much as 5.4% on Monday to $31,553. Ether is advancing higher and up 5.6% with a number of altcoins also in the green — Solana, Avalanche, Cardano are all up 11% today as market sentiment improves. Bitcoin has been trading around the $30,000 level for weeks now, defying predictions of a potential further decline but also struggling to gain upward momentum as the broader US market has also taken a beating. Speculative assets like technology stocks and cryptocurrencies are expected to be hit the hardest by the Fed’s plans to shrink its balance sheet, according to the latest MLIV Pulse survey.
  • Paul Singer’s Elliott Investment Management is seeking $456 million in damages from the London Metal Exchange over its decision in March to cancel billions of dollars worth of nickel trades after a massive short squeeze. The move by the activist investor ratchets up pressure against the LME, which has been widely criticized for its handling of the crisis in nickel. The exchange is also facing a review by UK regulators, while the nickel market has been stuck in an extended limbo of low liquidity and volatility. The suit was filed by two Elliott vehicles against the LME and its clearinghouse in the English High Court on June 1, according to a statement issued by Hong Kong Exchanges & Clearing Ltd., which owns the LME. The LME said it views the claim as without merit, and will contest it vigorously.

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

*All sources from Bloomberg unless otherwise specified