June 6, 2023

Daily Market Commentary

Canadian Headlines

  • Brookfield Asset Management Ltd. is aiming to raise $15 billion for its fifth flagship real estate fund, less than its previous version, according to people familiar with the matter, as the global property market is roiled by rising borrowing costs. Brookfield, one of the world’s largest owners of prime office properties, started raising money earlier this year for the new vehicle just months after closing its fourth fund at $17 billion. A spokesperson for the Toronto-based asset manager declined to comment. The firm is seeing attractive value entry points, Brookfield Asset President Connor Teskey told shareholders last month, adding that investors “believe that this could be a tremendous vintage for us, and therefore, there is lots of interest.” Only a small percentage of the equity in the firm’s current flagship real estate funds is invested in office properties.

World Headlines

  • European stocks were muted on Tuesday, with chipmakers leading the tech sector lower after a glum outlook from Taiwan Semiconductor Manufacturing Co. The Stoxx Europe 600 Index was little changed at 8:40 a.m. in London as data showed an unexpected drop in German factory orders, further dimming prospects for Europe’s largest economy. Miners got a boost from a report that Chinese authorities asked the nation’s biggest banks to lower their deposit rates. The broader market rose briefly on the news before paring gains. A strong rally in Europe’s benchmark index faltered last month amid worries about sticky inflation and higher-for-longer interest rates. European Central Bank President Christine Lagarde said Monday inflation pressures remain powerful and borrowing costs will be raised further to tackle them — cementing expectations for another interest-rate hike at next week’s meeting.
  • US futures fluctuated, with Apple Inc. poised to extend losses, while a drop in oil prices weighed on energy stocks. Contracts on the Nasdaq 100 edged lower, with Apple down 0.4% in premarket trading on concern the steep price of its much-anticipated mixed-reality headset will crimp shipments. Across global equity markets, the mood was cautious. With the S&P 500 on the edge of a new bull market, there’s a sense among traders that markets have run up too fast on the hype for artificial intelligence.
  • Asian stocks climbed to the highest since Feb. 17, helped by a rally in Chinese developers on bets that the government may roll out further policy support for the property industry. The MSCI Asia Pacific Index rose as much as 0.5%, driven by gains in the real estate and industrial sectors. TSMC, along with Japanese trading houses Mitsui & Co. and Mitsubishi Corp. were among the biggest contributors to the gauge’s climb. Japanese equities led the region higher, while stocks extended declines in Australia after its central bank unexpectedly raised its key interest rate. South Korea was closed for holidays. Chinese stocks in Hong Kong ended little changed though developers rallied amid hopes of more policy support from the central government to prop up growth. Bloomberg News reported late in the Asia day that Chinese authorities asked the nation’s biggest banks to lower their deposit rates for at least the second time in less than a year, citing people familiar with the matter.
  • Oil erased all the gains that followed Saudi Arabia’s surprise weekend pledge for extra supply cuts. West Texas Intermediate dipped below $71 a barrel on Tuesday, down by about $1 from Friday’s close. The drop comes after Monday’s short-lived surge following the tense OPEC+ meeting and Saudi announcement. The kingdom also raised its crude prices for July. Saudi Arabia pledged to do “whatever is necessary” to stabilize the market with concerns over the demand outlook, especially from China, weighing on prices in recent weeks. Oil tumbled 11% last month, in part due to resilient Russian output, despite the OPEC+ producer saying earlier this year it would reduce supply.
  • Gold was steady after rising 0.7% on Monday as data showed weaknesses in the US economy, increasing speculation that the Federal Reserve is set to pause its rate-hike cycle. Bullion investors are again focused on US monetary policy following the resolution of the debt-ceiling standoff. Treasury yields and the dollar fell on Monday after figures showed the US service sector almost stalled in May as orders dried up, while a measure of prices paid slid to a three-year low. Spot gold was little changed at $1,961.40 an ounce as of 10:12 a.m. in London. The Bloomberg Dollar Spot Index was steady. Silver and platinum were little changed while palladium edged higher.
  • Wheat surged after an escalation in fighting between Russia and Ukraine, including the destruction of a giant dam and damage to an ammonia pipeline that Russia sees as key in talks about maintaining the flow of Ukrainian grain shipments through the Black Sea. Ukraine said Russia blew up the dam in the country’s south, unleashing a torrent of water that threatens residents and complicates the battlefield separating the two armies along the Dnipro river. The dam is some way from the three Ukrainian ports covered under the Black Sea grain deal, but the flooding poses a severe risk to people, transport and logistics.
  • Consumer expectations for euro-zone inflation eased significantly in April, adding to the case for the European Central Bank’s historic ramp-up in interest rates to conclude this summer. Expectations for the next 12 months fell to 4.1% from 5% in March, the ECB said Tuesday in its monthly survey. For three years ahead, they slid to 2.5% from 2.9% — moving toward the 2% medium-term target. German bonds extended gains after the release and traders pared bets for further interest-rate hikes, though another half-point of increases as early as September remains fully priced. The yield on two-year securities fell as much as 8 basis points.
  • UK house builders cut back on developments at a pace last seen during the pandemic and the global financial crisis 14 years ago after a jump in mortgage rates, a closely watched survey found. S&P Global said its PMI index for the sector dropped to 42.7, the lowest since May 2020 when homebuilding was brought to a standstill by the first Covid-19 lockdown. Excluding the pandemic, it was the weakest since 2009. It bucked a wider pickup in the construction industry in May. The overall PMI rose to 51.6 from 51.1 in April, boosted by commercial building and civil engineering work. It was stronger than the 50.8 forecast by economists, with any reading above 50 signaling growth.
  • Intel Corp., the largest US chipmaker by revenue, will sell part of its holdings in Mobileye Global Inc., raising about $1.48 billion for its ambitious spending plans. The US company is offering 35 million shares with an option to sell a further 5.25 million shares of the Israeli automated driving technology maker, Mobileye said Monday in a regulatory filing. Mobileye stock has more than doubled since its initial public offering last October. Goldman Sachs Group Inc. and Morgan Stanley will underwrite the sale. Intel Chief Executive Officer Pat Gelsinger has launched an ambitious plan to regain his company’s lead in the semiconductor industry by building new plants and rapidly improving its manufacturing technology. He’s doing that at a time when the main market for his products, personal computers processors, has slumped. And the company is losing market share, which is hurting sales and profit.
  • Taiwan Semiconductor Manufacturing Co. tempered its outlook for 2023 capital spending, as the main chipmaker to Apple Inc. grapples with soft demand for smartphone and computing chips. Its capital expenditure should wind up closer to the bottom end of a previously forecast $32 billion to $36 billion range, Chairman Mark Liu told reporters after hosting the firm’s annual shareholders’ meeting on Tuesday. TSMC reaffirmed projections for revenue in the first half of 2023 to decline by about 10% in US dollar terms. The more moderate projection suggests TSMC, like its rivals across the electronics industry, remain cautious in the face of a cratering in consumer spending and an uneven post-Covid Chinese economic recovery. The Taiwanese chip linchpin has said previously semiconductor demand is likely to improve in the latter part of this year, after PC, server and smartphone makers digest inventories.
  • The roaring rally in tech stocks has further to go, as the buzz around artificial intelligence and hopes for a pause in the Federal Reserve’s rate hikes give them an edge, according to Citigroup Inc. quantitative strategists. The growth style investing factor in the US has by far been the most successful with a nearly 20% jump this year, as AI-driven gains boosted Nvidia Corp. to a $1 trillion market value and drove a record outperformance of tech stocks against non-tech S&P 500 companies. That aside, an unpredictable economic outlook means that US technology stocks may rise even more. “We remain positive on Growth for June as we see more tailwinds than headwinds manifesting for this Style over the next month,” a team including Chris Montagu wrote in a note. He however warned that gains in stock market indexes were driven by fewer stocks in May, which posed a risk.
  • The Biden administration is tapping an official from Pennsylvania State University to head its new semiconductor research and development program as its builds out the leadership team for a $52 billion plan to bolster US economic and national security. Lora Weiss, senior vice president for research at Penn State, will become director of the R&D office within Chips for America of the Commerce Department, which will deploy $11 billion to set up a network of advanced computer-chip design and engineering facilities. At the university, where Weiss earned a Ph.D. in acoustics, she oversaw the research of 12 academic colleges, seven interdisciplinary research institutes, and an affiliated research center for the Navy. Before working at Penn State, she spent 13 years at Georgia Tech.
  • Germany and India are closing in on a deal to build diesel submarines in the South Asian country as Russia’s prolonged war in Ukraine pushes New Delhi to expand its sources of military hardware beyond top supplier Moscow. Thyssenkrupp AG’s marine arm and India’s Mazagon Dock Shipbuilders Limited are likely to jointly bid for a project worth an estimated $5.2 billion to build six submarines for the Indian navy, according to people with knowledge of the matter, who asked not to be identified as the details are confidential. A preliminary agreement, or memorandum of understanding, will be signed in the presence of Boris Pistorius, the defense minister in Chancellor Olaf Scholz’s government in Berlin, who arrived in New Delhi Tuesday for a two-day visit, German and Indian officials said.
  • Sequoia Capital, the venture capital powerhouse, is breaking up into three entities across the globe, splitting the Chinese and US operations as tensions grow between the world’s two largest economies. The firm, known for its early backing of Google, Instagram and some of China’s biggest internet companies, will split up into independent partnerships and separate firms, operating under different brands, no later than at the end of March next year, the company said. “It has become increasingly complex to run a decentralized global investment business,” Sequoia said in a press release co-authored by regional heads Roelof Botha, Neil Shen and Shailendra Singh. “This has made using centralized back-office functions more of a hindrance than an advantage.”
  • Billions of dollars of leveraged loans are running short on time to transition away from the scandal-plagued London interbank offered rate before the benchmark is phased out at the end of June. A little over half of the underlying loans in CLOs still need to make the switch, according to Barclays Plc research as of May 30. CLOs own about two-thirds of the institutional leveraged loan market, and are a proxy for understanding what’s happening in the $1.4 trillion asset class. While new loan contracts were barred from using Libor at the start of last year, existing debt was given until mid-2023 to make the switch. The expectation was that most deals would transition to Libor’s replacement, known as SOFR, as they were refinanced. But as the deadline approached, the normal pace of refinancing dropped off significantly amid quickening inflation, rising interest rates and growing macroeconomic risks.
  • French unions are holding a fresh day of strikes against Emmanuel Macron’s pension reform in a test of whether the president has succeeded in getting much of the country to move on from the politically damaging fight. People face less disruption on Tuesday than during previous protests, which stretch back to January. Rail operator SNCF planned to operate nine out of 10 trains, while service is normal on the Paris subway. Some schools are closed. The biggest impact to transportation will likely be to flights. The DGAC civil aviation authority has asked carriers to cut one-third of services at Paris-Orly airport, as well as one-fifth at airports in Lyon, Marseille, Nice, Toulouse and Nantes.