June 7, 2023

Daily Market Commentary

Canadian Headlines

  • The Canadian dollar has settled into a Goldilocks range, and is missing a much-needed catalyst to break out of that trap. With the Bank of Canada having moved to the sidelines and the Federal Reserve looking to pause this month, there is no obvious impetus to move USD/CAD in either direction. The Canadian central bank meets today, with just a handful of economists expecting a 25-basis point increase. The majority reckon that the overnight lending rate will stay unchanged at 4.50%. If you ask interest-rate traders, conviction that the BOC will stay on hold isn’t quite as high, with the markets assigning a near 50-50 chance of a move.
  • Several mining companies have temporarily halted operations and exploration activities in eastern Canada as unprecedented wildfires rage. Iron Ore Co. of Canada, which is majority owned by Rio Tinto Group, is in the process of idling operations at the mine, concentrator and pellet plant in Labrador City, Newfoundland, because it can’t ship products out. Its 418-kilometer (260-mile) Quebec North Shore and Labrador Railway is suspended until at least Friday “due to fire and smoke hazards, as well as damage to our telecommunications infrastructure and power line along the track,” a company spokesperson said in an email. In the Northern Abitibi region of Quebec, Hecla Mining Co. suspended operations at its Casa Berardi gold mine due to an emergency order from the provincial government prohibiting access to lands impacted by forest fires. Canada is on pace for its worst-ever wildfire season on record, with approximately 3.3 million hectares (8.2 million acres) burned so far this year, according to data from the Canadian government. That’s almost double the area of Lake Ontario. Smoke has drifted south and is hanging over New York, Toronto and Ottawa, among other affected cities, on Tuesday.

World Headlines

  • European shares were steady as strong updates from Zara-owner Inditex SA and Danske Bank A/S failed to stir a risk-on mood among investors watchfully preparing for key central bank meetings next week. The Stoxx 600 Index was little changed by 11:39 a.m. in London, with insurers and auto stocks underperforming, while retailers climbed the most in more than two months. Inditex advanced to the highest since August 2017 after it reported an estimate-beating 43% jump in operating profit. Danske Bank shares gained 5.9% after the lender raised its key target for profitability.
  • US futures and European shares failed to build Tuesday’s gains as a rally in megacap stocks that had propelled the S&P 500 to the edge of a bull market continued to fizzle. Apple Inc. looked set to extend Tuesday’s decline, falling in premarket trade along with Nvidia Corp. and Microsoft Corp., in a signal that more air is coming out of the rally in tech shares. The potential that central banks will keep rates higher for longer, disappointing hopes they will pivot to rate cuts later this year, is weighing on tech. Because such companies derive their values from future cash flows, higher rates would brake the momentum in megacap stocks.
  • Asian stocks were mixed, amid expectations for further policy support to revive China’s economy and the nation’s export data stoking concerns around global demand. The MSCI Asia Pacific Index swung in a narrow range, with declines in industrials and health care moderating gains in real estate stocks. Tech names including TSMC, Tencent and Alibaba were among the biggest contributors to the gauge’s gains. Benchmarks in Hong Kong, Taiwan and South Korea rose. Hong Kong stocks climbed amid optimism for additional policy support from the central government to boost growth. This comes after authorities asked the nation’s biggest banks to lower their deposit rates and amid news of US Secretary of State Antony Blinken’s plan to visit China in the coming weeks. Yet, stocks in mainland China fell as the nation’s exports stoked further concerns about the strength of global demand.
  • Oil fluctuated as traders balanced an uncertain economic picture against Saudi Arabia’s bullish supply cut. West Texas Intermediate futures rose above $72 a barrel, erasing an earlier loss. Official US stockpile data are due later, following an industry group report that showed a decline in crude inventories. The global economy is set for a weak recovery from the shocks of Covid and Russia’s war in Ukraine, the Paris-based OECD said Wednesday. Separately, trade data for China in May painted a mixed picture. Oil has lost around 10% this year amid concerns about China’s recovery and a rapid increase in interest rates by the US Federal Reserve. Russian crude flows remain high even after the nation said it would reduce output.
  • Gold held steady for a second day, as traders weighed the outlook for more interest-rate hikes in the US following comments from an ex-policymaker. Former Federal Reserve Vice Chair Richard Clarida said the bank would probably raise rates again in this cycle and would be unlikely to cut them until next year. Traders increasingly expect the Fed to hold rates steady at its June meeting, keeping the option for hikes later on. Gold has been consolidating around $1,950 an ounce in recent weeks, as investors await clearer indications for direction of US monetary policy. Holdings in exchange-traded funds backed by the precious metal have flatlined this month after creeping higher since March.
  • Wheat slipped after a five-day advance as traders assessed the implications of the escalation of fighting in Ukraine, the destruction of the Kakhovka dam, and the weather outlook for the major growing areas. Prices had climbed more than 6% in five days from the lowest in about 30 months, supported by worries over the weather and the Ukraine situation. The explosion that tore through the Ukraine dam on Tuesday unleashed an environmental disaster that cut freshwater and electricity supplies for millions of people, flooded dozens of towns and could ultimately burden the country’s southern region for decades.
  • The global economy is set for a weak recovery from the shocks of Covid and Russia’s war in Ukraine, dogged by persistent inflation and the restrictive policies of major central banks seeking to contain price pressures, the OECD said. The Paris-based organization’s latest Economic Outlook forecasts a 2.7% expansion of world output this year and only a modest pickup to 2.9% in 2024, both below the 3.4% average in the seven years before the pandemic. The US, the euro area and China will see the same relative sluggishness in their recoveries, while inflation will be stronger than in the period through 2019. The situation creates a particular headache for central banks as they must continue to react to core price pressures that are proving stronger than expected, while not overly hurting growth, the OECD said.
  • The PGA Tour and Saudi Arabia-backed challenger LIV Golf avoided calling their proposed partnership a merger. But their shock announcement is already raising serious concerns with US and European antitrust enforcers, according to people familiar with the matter. The tie-up, which was announced Tuesday, is being viewed by officials as a brazen play loaded with red flags, not the least of which is creating a giant monopoly in an industry that had only recently gained a competitor, said the people, who asked not be identified discussing non-public matters. After nearly a year-long acrimonious legal battle, the rival golf leagues said they would join with the DP World Tour, the European golf circuit, and combine their golf-related business and rights into a new commercial entity. The agreement will resolve the ongoing antitrust litigation between PGA and LIV, though final terms of the deal, including the finances, are still in the works.
  • Cathie Wood’s funds boosted their holdings of Coinbase Global Inc. as shares slumped after the Securities and Exchange Commission accused the company of operating an unlawful exchange. Three Ark Investment Management LLC funds, including Wood’s flagship Ark Innovation ETF, bought 419,324 shares of the cryptocurrency exchange operator Tuesday as it tumbled as much as 21%, data compiled by Bloomberg show. Shares of the company rebounded to rise as much as 4.2% in premarket trading on Wednesday. Ark is the fourth-largest holder of Coinbase and has been adding to its stake on dips for nearly a year despite crypto-market volatility caused by issues including the collapse of Sam Bankman-Fried’s empire, a widening US regulatory crackdown, and a spate of bankruptcies among companies in the industry.
  • Alisa Mall, the chief investment officer for Michael Dell’s family office, is looking to diversify her portfolio as the firm is poised to absorb an influx of cash and stock that together is worth more than $20 billion. The money will come in after Broadcom Inc. closes on its $61 billion purchase of cloud-computing company VMware Inc., which counts Dell as its largest shareholder with a 36% stake. If the deal is approved by European regulators, Dell, 58, will receive half his payout in shares and about $10 billion in cash. Dell is worth about $54 billion, according to the Bloomberg Billionaires Index.
  • New York was the most polluted major city in the world on Tuesday night, as smoke from Canadian wildfires blanketed the city in haze, according to the IQAir website. Pollution levels in the city were deemed to be in the “unhealthy” range, and were higher than those in the Indian capital Delhi and Baghdad at 1:25 a.m. New York time, according to the Swiss air quality company. Other North American cities were also being afflicted by smoke from the unprecedented wildfires, with Detroit affected particularly badly. New York City Mayor Eric Adams said in a statement Tuesday night that an Air Quality Health Advisory had been issued for all five boroughs, and while conditions were expected to improve through Wednesday morning, they were predicted to worsen again later in the day.
  • Sequoia Capital’s plan to split itself into three separate regional firms represents a major shift at one the world’s foremost venture capital firms. It also shows the impact of rising political tensions between the US and China on an institution that’s made huge profits in both. Sequoia on Tuesday announced that its India, China and US units — which share investors and some returns — would officially become separate entities. “It has become increasingly complex to run a decentralized global investment business,” Sequoia leaders said in a statement, citing the pitfalls of a centralized back office. Left unsaid is that the move is a concession to increasing pressure in the US to distance Silicon Valley from China. Sequoia’s China investments  have been the subject of criticism inside the normally clubby world of technology investing, and the firm is facing a looming executive order from the Biden White House that could curtail US investments into foreign entities. The measure targets the practices that helped Sequoia generate billions in profits overseas for more than 15 years, despite recent market tumult.
  • The UK’s opposition Labour Party is on track for a landslide victory at the next general election, according to a new poll — with a higher than typical sample size — that is likely ramp up the pressure on Conservative Prime Minister Rishi Sunak. Labour could win 470 seats at the election, with the Tories plummeting to just 129, according to the baseline scenario of an MRP poll by Focaldata, which asked 10,140 people in Great Britain how they intend to vote. That would give Labour a huge majority of more than 140 seats, it said. This is the first so-called MRP poll under new constituency boundaries due to come in at the next election, which must be held by January 2025 at the latest.
  • Trafigura Group paid $3 billion to its top traders and executives as the commodity trading giant notched up a fresh record profit in the six months to March. The payout — Trafigura’s highest ever — is the latest evidence of how a small group of commodity traders have shared an unprecedented bounty on the back of the energy crisis triggered by Russia’s invasion of Ukraine. Trafigura reported net profit of $5.5 billion in the six months to March, up 108% from the same period a year earlier and the third successive half year in which it has reported record earnings. The results came even as the company, one of the world’s largest commodity traders, was hit by a massive alleged nickel fraud.
  • US mortgage applications for home purchases fell for a fourth week as 30-year fixed rates held close to an almost seven-month high. The Mortgage Bankers Association index of applications for home purchases dropped 1.7% in the week ended June 2 to 151.7, the second-lowest level since 1995. The contract rate on a 30-year fixed mortgage decreased 10 basis points to 6.81%, according to the data out Wednesday. The five-year adjustable-rate mortgage surged 54 basis points to 5.93%, the highest in MBA data back to 2011. Mortgage rates had been climbing in recent weeks, offering potential homebuyers little incentive to apply for new mortgages. While the latest pullback in borrowing costs is welcome, rates remain elevated. That’s not only weighing on housing affordability more generally but also deterring many potential sellers from listing their homes.
  • Coinbase Global Inc. knew all along that it could be courting trouble with regulators.  More than two years ago, when the crypto exchange filed with the US Securities and Exchange Commission to start publicly trading its shares, it said there was a “high degree of uncertainty” regarding the legality of its operations, warning that “regulators may disagree” with the company’s view that it wasn’t covered by their rules. That possibility became reality on Tuesday, when the SEC sued Coinbase for failing to register with the agency as a broker, an exchange or a clearing firm — all roles that the company plays in a cryptocurrency market where many tokens are, according to the agency, actually unregistered securities. The regulator also alleged that Coinbase’s staking program, which allows customers to lock up their coins in return for a share of rewards offered by various blockchains, violates securities laws, as well.
  • China’s four big state lenders have effectively cut dollar deposit rates, according to people familiar with the matter, at a time when strong demand for the US currency in the banking system helped push the yuan to a six-month low. The banks have recently lowered the ceiling on the rates — which are a spread over the US Secured Overnight Financing Rate — for both companies and individuals, said the people who requested anonymity discussing private matters. Some of the lenders’ provincial branches now offer around 5.7% on dollar deposits to their biggest clients, down from 6% previously, one of the people said. The four lenders, namely Industrial & Commercial Bank of China Ltd., Bank of China Ltd., Agricultural Bank of China Ltd. and China Construction Bank Corp., didn’t immediately respond to requests for comment. The news was earlier reported by the Securities Times.
  • BNP Paribas SA will no longer help arrange bond deals if the issuer intends to use the proceeds to finance new fossil-fuel exploration and production. The development means bond syndications and debt capital markets deals associated with projects for producing more oil and gas are now off-limits for the largest French bank, according to a person familiar with the guidelines who asked not to be identified because they’re not authorized to discuss the matter in public. The decision adds detail to an announcement made last month by BNP, when the Paris-based bank laid out plans to expand restrictions around fossil-fuel financing, including the phaseout of its support for non-diversified oil exploration and production firms. BNP was criticized at the time by nonprofit ShareAction, which said the measures didn’t go far enough.