June 8, 2022
Daily Market Commentary
Canadian Headlines
- Canada Pension Plan Investment Board and OMERS Infrastructure are exploring the sale of their lease attached to the Chicago Skyway Toll Bridge, according to people with knowledge of the matter. The firms are working with an adviser to solicit interest in the 7.8-mile (12.6 kilometers) toll-road concession, the people said, requesting anonymity to discuss private negotiations. Any transaction is expected to value the asset at more than $4 billion including debt, one of the people said. CPPIB, OMERS and Ontario Teachers’ Pension Plan agreed to acquire the lease in 2015 in a $2.8 billion transaction that gave each pension fund a roughly 33.3% stake. OTPP plans to retain its stake, the people said.
- Shopify Inc. investors were divided on the e-commerce company’s proposal to entrench Chief Executive Officer Tobi Lutke’s voting power. Just under 54% voted in favor of creating a special “founder share” that guarantees Lutke at least 40% of the voting rights at the company under certain conditions, according to a statement Wednesday from Shopify. To pass, the proposal required the support of a majority of the votes cast by shareholders, excluding the shares Lutke controls, at Tuesday’s virtual annual meeting. Ahead of the meeting, shareholder advisory firms Glass Lewis & Co. and Institutional Shareholder Services Inc. recommended that investors reject the arrangement. The California Public Employees’ Retirement System had indicated it would vote against the proposal.
World Headlines
- European stocks dropped on persisting worries about high inflation and slowing growth, with investors bracing for a crucial European Central Bank meeting that should provide clues on the scope of monetary tightening. The Stoxx Europe 600 Index was down 0.7% by 12:06 p.m. in London. Financial services stocks led the declines as Credit Suisse Group AG slumped after saying it expects a loss at the group-wide level and investment bank in the second quarter. Retail and technology outperformed. Europe’s benchmark gauge has had a muted start to June after extending declines last month, with investors torn between worries of a potential recession and the allure of cheaper valuations. Concerns are also rising about the impact of high input prices on major corporate earnings.
- US equity futures fell with European stocks on persisting worries about inflation and measures by central banks to contain it. The dollar advanced. S&P 500 and Nasdaq 100 futures slipped, signalling a pause following two days of gains in the underlying indexes. Treasury yields also rose, taking the benchmark 10-year rate back to 3%. Later in the week, focus will turn to the US consumer price index reading for clues on the Federal Reserve rate path following the central bank’s outsized hike on May 4. The data is expected to show inflation picked up from a month ago, but slightly slowed from a year earlier. Yet some argue that central banks will be forced back into dovish mode, among them hedge fund founder Ray Dalio. The billionaire saidcentral banks across the globe will be required to cut interest rates in 2024 after a period of stagflation.
- Asian stocks rose as Beijing’s move to approve a slew of new video games bolstered bets that the outlook is improving for the Chinese technology sector. The MSCI Asia Pacific Index advanced as much as 1.1%, with Alibaba and Tencent providing the biggest boosts. Benchmarks in Hong Kong outperformed on the approvals news, while Japanese equities climbed as the yen continued to weaken. Stocks in India fell after the country’s central bank raised interest rates as expected while Thai shares inched up after the Bank of Thailand kept its benchmark rate unchanged. China approved more games in a step toward normalization after a months-long freeze amid the government’s crackdowns on the tech sector. The news follows a report earlier this week that regulators are preparing to conclude an investigation of ride-hailing giant Didi.
- Oil extended gains from the highest close in three months as the US summer driving season ramps up and China emerges from virus lockdowns. West Texas Intermediate futures rose above $120 a barrel after settling 0.8% higher on Tuesday. Futures have fluctuated near a three-month high so far this week as banks including Goldman Sachs Group Inc. and Morgan Stanley underlined calls for higher prices in the coming months. On Tuesday, the American Petroleum Institute reported that US gasoline stockpiles rose by 1.82 million barrels last week, according to people familiar with the data. That’s unlikely to provide much relief to a tight fuel market, with inventories at the lowest seasonal level in years.
- Gold held Tuesday’s gain, with warnings of slowing global economic growth amid a surge in inflation bolstering its appeal as a haven. Bullion has edged up since mid-May on more troubling signs in the world economy, although an uptick in the dollar and bond yields has weighed on prices. Still, the greenback’s choppiness has kept gold in a range as traders assess the Federal Reserve’s monetary policy tightening stance against that of other central banks, according to Madhavi Mehta, a senior analyst at Kotak Securities Ltd.
- The world economy will pay a “hefty price” for the war in Ukraine encompassing weaker growth, stronger inflation and potentially long-lasting damage to supply chains, the OECD said. The organization slashed its outlook for global growth this year to 3% from the 4.5% it predicted in December and doubled its inflation projection to nearly 9% for its 38 member countries, according to forecasts released on Wednesday in Paris. In 2023, it expects growth to slow to 2.8%. The price of war could be “even higher,” it warned, describing a long list of risks ranging from an abrupt cut-off of Russian supply in Europe to vulnerabilities on financial markets from high debt and elevated asset prices.
- So far, 2022 is on quite a roll: war, inflation, market selloffs, recession worries, virus lockdowns in China, and record-breaking consumer pessimism in the US, plus a new book by inequality expert Thomas Piketty spotlighting the unfairness of it all. Amid all the gloom, the most unequal of the world’s leading economies has gotten less so. The poorest half of Americans—the much-discussed but largely powerless US working class—are in the strongest financial position in a generation. The bottom 50%, generally households with net worth of $166,000 or less before the pandemic, now hold a bigger share of the nation’s wealth than they’ve had for 20 years, the Federal Reserve estimates. Their collective net worth, $3.73 trillion, has almost doubled in two years and is more than 10 times higher than in 2011, the nadir after the last recession.
- Some of the riskiest loans given to millennials and Gen Z shoppers for clothes and electronics — and neatly repackaged for investors — are dropping in value. Securitization packages of buy-now-pay-later loans from one provider, Affirm Holdings Inc., are falling in price for investors to buy while becoming more expensive to issue, after rising rates and a cost of living crisis cast a shadow over the sector. Affirm has over 12.7 million customers and extended around $3.9 billion of loans in the first three months of 2022. It was valued at $47 billion in September after a blockbuster listing on Nasdaq in January 2021, but its shares have fallen over 80% this year.
- Microsoft Corp. is substantially reducing its business in Russia, joining the list of prominent technology firms cutting back or exiting the country altogether after the Russian invasion of Ukraine. “As a result of the changes to the economic outlook and the impact on our business in Russia, we have made the decision to significantly scale down our operations in Russia,” the company said in an emailed statement. “We will continue to fulfill our existing contractual obligations with Russian customers while the suspension of new sales remains in effect.” More than 400 employees will be affected, a company spokesperson said. “We are working closely with impacted employees to ensure they are treated with respect and have our full support during this difficult time,” Microsoft said in the statement.
- A group led by Rob Walton, the son of Walmart Inc. founder Sam Walton, agreed to buy the National Football League’s Denver Broncos for an amount that’s likely to be the highest ever paid for a US professional sports team. Walton’s group includes his daughter Carrie and her husband, Greg Penner, along with Mellody Hobson, co-chief executive officer of Ariel Investments, the two sides said in a joint statement Tuesday. They didn’t disclose terms for the deal, which needs approval from the NFL’s finance committee and league ownership. The offer was worth $4.65 billion, ESPN reported, citing NFL sources it didn’t identify. Walton, 77, was an early frontrunner in a crowded field of contenders vying for the first NFL team to go up for sale in four years, which included billionaires Josh Harris, co-founder of Apollo Global Management Inc., and mortgage mogul Mat Ishbia. But the former Walmart chairman has vastly more money to deploy: He’s the 17th-richest person in the world with a net worth of $58.7 billion, according to the Bloomberg Billionaires Index.
- Honda Motor Co. and LG Energy Solution are eyeing Ohio as the frontrunner location for a new North American battery plant, according to people with knowledge of the matter. The Midwestern state is considered a strong candidate because Honda already has automaking plants there, making it easier for LG Energy to transport the batteries, one of the people said. A final decision has yet to be made and the ultimate location could still change, according to the people, who declined to be identified because the discussions are private. A representative for LG Energy Solution said the company was unable to comment on speculation. A spokesperson for Honda declined to comment.
- It’s down to a billionaire and a veteran politician in the Los Angeles mayoral race. From a field of a dozen candidates, residents of the second-biggest US city picked two people who couldn’t be more different: Rick Caruso is the developer of high-end malls such as the Grove in Los Angeles, while Karen Bass was a former community organizer who’s been a US congresswoman for more than a decade. Caruso had 42.1% of the vote compared with 37% for Bass in the primary, with an estimated 35% of the votes counted, according to a preliminary tally by the Associated Press. They’ll face off in November after both candidates fell short of the outright majority needed to win in the primary.
- The UK has displayed “bad faith” in how it has approached the part of the Brexit treaty dealing with Northern Ireland, Irish Prime Minister Micheal Martin said. “It is perfectly reasonable to look for ways to improve the operation of the Protocol — but unfortunately what we have seen are bad-faith efforts to undermine a treaty freely entered into,” Martin said in an address to the European Parliament on Wednesday. “Instead of trying to create a constructive atmosphere for all to engage, we have actually seen efforts to block agreements or introduce new problems.” The UK government has long been pushing to rewrite the Northern Ireland Protocol, which keeps the region in the EU’s single market while creating a customs border with the rest of the UK. Prime Minister Boris Johnson plans to introduce legislation as soon as Thursday to give ministers the power to override parts of the deal, although the timing could slip, according to people familiar with the matter.
- Credit Suisse Group AG is weighing a fresh round of job cuts, part of a renewed push to slash costs after warning of a second-quarter loss, according to people familiar with the matter. The Swiss bank is considering headcount reductions across divisions including investment banking and wealth management in different regions, said the people, who asked not to be identified as the matter is private. The dismissals are likely to come as the bank prepares to update investors on risk, compliance, technology and wealth management on June 28, said the people. Final numbers are still to be decided, they said. A Credit Suisse spokeswoman declined to comment, pointing to the lender’s statement on Wednesday.
- CF Industries Holdings Inc. will close one of its UK fertilizer plants permanently as it struggles with high energy costs. The company is proposing to shutdown the Ince facility as it restructures operations in Britain, it said Wednesday. The site, which hasn’t produced ammonia since September, was one of CF’s plants halted last year as soaring gas costs squeezed profitability. That prompted the government to step in to help keep some operations going. The move to close the factory highlights the challenge that expensive gas poses to European industries. The threat to fertilizer output has also been bad news for the food and drink sector, because the factories produce carbon dioxide as a byproduct. That gas is used to stun pigs and chickens for slaughter, extend the shelf life of fresh food and give beer and soda their fizz.
- One consolation for technology-stock bulls in this year’s bear market is that the lower valuations should spur mergers and acquisitions, helping to stabilize share prices. It’s not working out that way so far. Just this week, Elon Musk threatened to walk away from his $44 billion deal to buy Twitter Inc., which some analysts say is a gambit to negotiate a lower price. And a buyout firm cut the price it’s paying for software company Anaplan Inc. Also, banking-software provider Q2 Holdings Inc. reportedly ended efforts to sell itself after bids came in below expectations. The developments show that, even though it’s been a banner year so far for tech M&A, acquirors aren’t about to ride to the rescue of battered investors. For that to happen, markets need evidence that economic growth will hold up in the face of raging inflation and higher interest rates from the Federal Reserve.
- A wild year on Wall Street has traders fretting one of two extreme scenarios will engulf the $23 trillion Treasury market ahead: Either a fresh bond selloff thanks to red-hot inflation — or a sustained rally on mounting recession risk that sends yields back toward historic lows. Market participants are butting heads over what big move will come next. The Federal Reserve is embarking on a high-wire mission to ramp up interest rates at the fastest pace in decades without crashing the real economy, endangering investing styles of all stripes. In a bearish scenario, managers like Bridgewater Associates reckon the 10-year yield could jump to 4% as inflation proves relentless — a prospect that risks more damage for just about everything from tech stocks to emerging markets.
- Spirit Airlines Inc.’s board postponed a crucial June 10 vote to gain more time to build shareholder support for a company-backed buyout deal with Frontier Group Holdings Inc., days after JetBlue Airways Corp. raised its rival takeover offer to $3.4 billion and added an upfront cash payment. The balloting was reset for June 30, with the intent of giving Spirit directors time to continue discussions with Spirit shareholders and both of its suitors, the board said in a statement Wednesday. Spirit is still bound by terms of the stock-and-cash takeover agreement with Frontier initially valued at $2.9 billion, still recommends that deal and hasn’t determined that JetBlue’s proposal is superior, according to the statement. JetBlue is hoping its higher bid, which includes an upfront cash payment, eventually will win the support of Spirit’s board while also building more support among Spirit shareholders for its offer ahead of any future vote. At stake for JetBlue is possibly its best bet for a fast track to growth that would position it as a more formidable competitor to the four major carriers that dominate the US market.
- San Francisco residents voted to recall Chesa Boudin, a progressive district attorney who sought to reform the city’s criminal-justice system but met fierce opposition from critics who painted him as too soft on crime. About 60% of voters favored ousting Boudin, according to the Associated Press, with about two-thirds of votes counted. He’ll be replaced by an interim DA chosen by Mayor London Breed. The controversial referendum comes as local officials across the country debate approaches to public safety. Boudin, 41, took office in January 2020 with promises of holding police accountable and ending harsh sentencing that fueled mass incarceration. But opponents blamed him for many of San Francisco’s ills, including spikes in some categories of crime and drug use on city streets.
- Plug Power Inc. will open a hydrogen production plant at Europe’s second-largest seaport — the strategically located Port of Antwerp-Bruges– as the continent turns to the climate-friendly fuel to replace Russian natural gas. Plug Power has leased space at the Belgian port for a plant that will produce 35 tons of hydrogen each day, with the gas stripped off water using electricity from nearby wind turbines, the company said Wednesday in a statement. The fuel will help curb greenhouse gas emissions stemming from the movement of goods at the port and generate electricity for docked ships. Europe sees hydrogen as both a way to fight global warming and replace Russian fossil fuels in the wake of the Ukraine invasion. The European Union is targeting 10 million tons of clean hydrogen production per year — and the same in imports — by 2030. Hydrogen can generate electricity without emitting carbon dioxide when fed through a fuel cell, either inside a vehicle or in a stationary plant, though the gas can have its own warming effects if it leaks into the atmosphere.
“Do what is right, not what is easy nor what is popular.” —Roy T. Bennett
*All sources from Bloomberg unless otherwise specified