March 1, 2022

Daily Market Commentary

Canadian Headlines

  • Canadian energy equities rose Monday, thanks to a 4.6% jump in crude oil futures, and led gains on the S&P/TSX Composite Index. The Composite advanced slightly to 21,126.36 in Toronto. Nutrien Ltd. contributed the most to the index gain, increasing 5.7%. Ballard Power Systems Inc. had the largest percentage increase, rising 16.5%.
  • Bank of Nova Scotia and Bank of Montreal got an earnings boost with commercial clients ramping up their borrowing as economies emerged further from the pandemic. Scotiabank increased fiscal first-quarter government and commercial loans 8.2% from a year earlier in its international division and 16% in its Canadian unit. At Bank of Montreal, business loans rose 9.9% in its Canadian banking unit and 9.1% in its U.S. division. Both banks’ overall profit topped analysts’ estimates. Canada’s banks had weathered the Covid-19 crisis with strong mortgage growth, helped by the country’s hot housing market. That lending strength is now broadening to other categories as economies recover from the earlier phases of the pandemic and omicron-variant infections dissipate, prompting businesses and consumers to borrow more. That helped Bank of Montreal’s net income rise 45% to C$2.93 billion ($2.31 billion), or C$4.43 a share, in the three months through January. Excluding some items, profit was C$3.89 a share. Analysts estimated C$3.29, on average. Bank of Montreal has been the top-performing major Canadian bank stock over the past year as it managed to control expenses and boost lending. Its success on those fronts are part of what has made its $16.3 billion agreement to buy BNP Paribas SA’s Bank of the West unit palatable to investors and analysts.

World Headlines

  • European stocks extended declines as the turbulence continued with investors weighing risks surrounding the intensifying war in Ukraine and economic implications from sanctions on Russia. The Stoxx Europe 600 Index was down 2% at 11:56 a.m. in London, with travel and leisure stocks leading the slump, followed by automakers and consumer shares. Stocks in the region have posted two consecutive months of declines, the longest streak of losses since October 2020, hit by fears over tighter monetary policy and surging inflation, with Russia’s invasion of Ukraine adding to the negative sentiment. In the latest developments, Russia escalated shelling overnight of key cities in Ukraine as its troops on the ground move slowly in a large convoy toward the capital and banned Russian residents from transferring hard currency abroad.
  • A fresh wave of volatility hit global markets on Tuesday as the conflict in Ukraine intensified amid mounting penalties against Russia. U.S. equity futures fell along with stocks in Europe, while bonds surged and oil pushed sharply higher. Futures on the S&P 500 and Nasdaq 100 declined, signaling a weak U.S. open. Treasury yields fell for a second day to the lowest since January, and the dollar was steady. Oil rose as traders balanced the possible release of emergency stockpiles against fears of disruption to Russian energy exports.
  • Asian stocks headed for a third-straight gain as diplomacy talks between Russia and Ukraine fueled hopes for a short-term solution. The MSCI Asia Pacific Index climbed as much as 0.8%, on track for its biggest three-day gain in a month. Technology and communication-services shares were the largest contributors to the gauge. Benchmarks in Japan outperformedthe region amid hopes for a gentler pace of U.S. interest rate increases. Investors’ concerns over Russia’s invasion of Ukraine eased slightly after both sides agreed to continue another round of talks in the coming days. Still, a wait-and-see mood dominates as global funds seek to assess the economic impact of sanctions imposed on Russia.
  • Oil pushed higher as the Russian invasion of Ukraine continued to ripple through the market, with the possible extension of sanctions offsetting the potential release of emergency reserves by some countries. Futures in London jumped by more than $5 a barrel. The European Union is discussing the exclusion of seven Russian banks from the SWIFT messaging system, including VTB Bank PJSC. It’s the latest in a list of mounting financial penalties against Russia.  Banks including Goldman Sachs Group Inc., Morgan Stanley and JPMorgan Chase & Co. have boosted their oil price forecasts, anticipating possible supply disruptions.   The U.S. and other major consuming nations are considering releasing 60 million barrels, according to people familiar with the matter. That would be equivalent to less than six days of Russian output, and traders are weighing the potential impact. The International Energy Agency will hold an extraordinary ministerial meeting on Tuesday, Executive Director Fatih Birolsaid.
  • Gold extended gains as traders weighed the impact of sanctions on Russia against Moscow’s countermeasures in the wake of the invasion of Ukraine. Bullion rose as much as 0.9% after its biggest monthly rally since May as the raft of penalties against Russia raised concerns over the impact on global growth and inflation. Disruptions to supplies of grain, energy and metals are adding to price pressures, as the Federal Reserve is preparing to raise interest rates. Russia’s economy is under huge pressure after the U.S. and its allies moved to block the central bank’s access to its foreign reserves and cut some lenders off from the SWIFT messaging system for global banking. President Vladimir Putin unveiled his own measures by banning residents from transferring hard currency abroad.
  • Gazprom PJSC’s daily natural gas exports edged higher last month, as demand increased amid concerns of potential supply disruptions due to sanctions placed on Russia and as prices subsided.  Buyers were encouraged as prices for the fuel declined from record highs seen at the end of 2021, following mild weather and inflows of liquefied natural gas. Concerns over supply tightness returned to the market at the end of February, when Russia’s invasion of Ukraine resulted in unprecedented sanctions and fears that Moscow could retaliate by cutting volumes to Europe. Restrictions imposed on Russia so far are not targeting energy deliveries. Gazprom exported an average of 421 million cubic meters of gas a day to countries outside the former Soviet Union in February, according to Bloomberg calculations based on the company’s data. While that’s almost 22% lower than the average for February 2021, it’s about a 15% increase from January.
  • Hong Kong’s Covid-19 fatality rate is now the highest in the developed world amid a wave of deaths among its under-vaccinated elderly population, ramping up pressure on officials to get the outbreak under control. The banking regulator in Hong Kong is lobbying the government to shorten the strict hotel quarantine placed on incoming travelers, seeking to reduce the hotel quarantine to 7 days, followed by another week of isolation from home. Hong Kong plans a lockdown to underpin a mandatory Covid-19 testing drive this month, according to local media. Japan ended a ban on new entry by foreigners and eased quarantine rules.
  • Billions of dollars in cash is at risk of being trapped, stock funds have plunged, and capital controls are choking off money flows. Russia has all the hallmarks of an uninvestable market for global investors. Russia-focused equity funds have tumbled 23% on average in the past week, according to data compiled by Bloomberg. Bonds have plummeted as default risks intensified, and trading the ruble has become a Herculean task with brokers stepping back from dealing with the currency. “The calamity of Russia’s war in Ukraine has put an end to international financial investing in Russia,” said Christopher Granville, managing director for EMEA and global political research at TS Lombard in London.
  • NASA awarded Space Exploration Technologies Corp. three additional crew-transport flights to the International Space Station through 2028. The new flights — to be completed by March 31, 2028 — give Elon Musk’s SpaceX a total of nine crew flights for NASA under a fixed-price contract valued at a total of $3.49 billion, the agency said Monday in a press release. SpaceX’s next crew mission to the ISS, its fourth, is set for April 15. Boeing Co., the other contractor NASA selected to ferry astronauts to the station, has struggled to resolve glitches with its Starliner vehicle. Boeing plans a second Starliner uncrewed test flight this spring.
  • The war in Ukraine has dimmed prospects for aggressive Federal Reserve rate hikes and that should bolster American equities even as markets endure a bout of volatility in the coming weeks. That’s the view of JPMorgan Chase & Co. strategists led by Marko Kolanovic, who have repeatedly urged investors to buy the dip during the global equity rout this year. In a fresh note released Monday, the top-ranked strategist says the direct impact on U.S. corporate earnings from the conflict should be “small.” While advising investors to go underweight European assets given the region’s vulnerability to any escalation after Russia’s invasion of Ukraine, Kolanovic pointed out that the crisis has forced the market to price in diminished odds of a 50-basis-point rate hike in March.
  • An international boycott of Russian vodka is building from the U.S. to Australia as politicians and corporations signal their opposition to President Vladimir Putin’s invasion of Ukraine by targeting one of his country’s most iconic products. At least three U.S. governors ordered the removal of Russian-made or branded spirits from stores, while one of the largest alcohol retail chains in New Zealand pulled thousands of bottles of vodka including the Ivanov and Russian Standard brands — and filled the empty shelves with Ukrainian flags. Boycotts are spreading to other goods in Russia’s European neighbors. Two of Australia’s biggest liquor chains, Dan Murphy’s and BWS, have stopped selling products of Russian origin, according to Sydney-based owner Endeavour Group Ltd., which has a market value of A$12.6 billion ($9.2 billion).
  • The U.S. and its allies are discussing a coordinated release of about 60 million barrels of oil from their emergency stockpiles after Russia’s invasion of Ukraine pushed crude prices above $100. The deliberations are currently focused on a release of 30 million barrels from the U.S. Strategic Petroleum Reserve and an equivalent amount from a group of other countries, according to three people familiar with the matter, who asked not to be identified discussing non-public deliberations. No decisions have been made and the discussions could continue for several more days, with the U.S. coordinating with other members of the International Energy Agency, the people said. Crude prices shot above $105 a barrel in London last week for the first time since 2014 on fears that oil and gas supplies from Russia could be disrupted, either by the conflict in Ukraine or retaliatory western sanctions. International benchmark Brent remained above $100 on Monday, exacerbating an inflationary surge for energy-consuming nations.
  • Chevron Corp. doubled its share buyback to as much as $10 billion a year, pledging that shareholders will see the benefits of high oil prices as it locks in spending at historically low levels and reduces costs. Oil surge to $100 a barrel and record high cash flows have allowed the company to raise the repurchase target, after it lifted the dividend more than expected earlier this year. It’s the latest example of the stunning turnaround for the industry after the pandemic had decimated earnings less than two years ago. Shareholders are now seeing the bonanza as majors including Exxon Mobil Corp., Shell Plc and BP Plc have all agreed to boost returns.
  • More than a dozen funds managing at least $3 billion have been frozen as the fallout from Russia’s invasion of Ukraine reverberates through financial markets.  Swiss asset management firm Pictet Asset Management was among the latest batch of firms to write to investors telling them they had suspended activities or restricted investors from accessing their money from funds investing in Russian securities. Its $637 million Russian equities money pool is down 42% this year through Friday.  The moves followed heavy losses in financial markets and many of the funds that were frozen have suffered losses of more than 30% this year. They’ve been hit by a new wave of sanctions designed to isolate Russia with measures including preventing the central bank from accessing its foreign reserves and locking some Russian banks out of the SWIFT system that helps trillions of dollars worth of transactions.
  • Man Group Plc said assets hit another record at the end of last year, bolstered by $13.7 billion in net inflows and performance gains in signs hedge fund industry is making a comeback. The world’s largest publicly listed hedge fund firm managed $148.6 billion at the end of December and its money pools generated $12.5 billion in performance gains last year, according to a statement Tuesday. Assets, which hit a fifth successive quarterly record, and net inflows both beat a consensus of analysts polled by the company. “Our diversified range of products and longstanding client relationships, combined with our diverse talent pool and cutting-edge technology, define Man Group, underpin our strategy and give me great confidence in our ability to continue to deliver value for our clients and shareholders,” Chief Executive Officer Luke Ellis said in the statement.
  • An investor group backed by DCP Capital Partners and Ocean Link Partners is nearing an agreement to acquire 51job Inc. in a deal valuing the Chinese online recruitment company at more than $4 billion, people familiar with the matter said. The consortium is hammering out final details of a deal to buy the Nasdaq-traded firm for about $61 per American depositary share, the people said, asking not to be identified because the information is private. The deal is set to be one of the largest take-private deals for a U.S.-listed Chinese firm this year.
  • Target Corp. soared after reporting a jump in fourth-quarter earnings and saying its results will continue to improve on top of the pandemic-related boom that has already sparked robust gains. Operating profit in the current fiscal year will post a percentage gain in the low single digits, the retailer said in a statement Tuesday, bucking Wall Street’s expectations that the closely watched number would decline. Adjusted earnings will expand in the high single digits after exceeding analyst estimates in the fiscal year that ended Jan. 29.  The latest results reinforce “the durability of our business model and our confidence in long-term profitable growth,” Target Chief Executive Officer Brian Cornell said in the statement.
  • Traders are casting aside wagers on a supersized Federal Reserve interest-rate hike in March amid concern that the fallout of Russia’s invasion of Ukraine will weigh on the growth outlook. Swaps linked to the Fed’s March 16 meeting priced in just 24.5 basis points of tightening on Tuesday. That suggests an unusually large half-point hike — which was all but fully priced last month amid concern over accelerating inflation — is now off the table. Bonds rallied across the curve, led by short-dated tenors. The repricing of the Fed outlook accompanied a wave of demand for the safety of Treasuries as Russia’s invasion of Ukraine entered a new and potentially more deadly phase. Russia’s armed forces will continue their “military operation” in Ukraine until they meet their goals, Interfax quoted Defense Minister Sergei Shoigu as saying.
  • President Joe Biden built his five-decade political career around his foreign policy expertise and deft touch with everyday Americans, qualities that polls show many voters now doubt. He’ll need to rediscover both of those traits Tuesday in his first State of the Union speech, as the U.S. and its allies step up pressure on Russia over Ukraine. Biden must also persuade skeptical voters that he can lead the country out of its pandemic doldrums after key pillars of his economic plan collapsed and inflation spiked. The speech at 9 p.m. in Washington comes at a critical time for Biden, with views of the president hitting new lows. Midterm elections in November are set to cost Democrats control of Congress and looming over it all are fears that the war in Ukraine could spiral into a wider conflict.
  • The invasion of Ukraine is causing a mass exodus of companies from Russia, reversing three decades of investment by Western and other foreign businesses there following the collapse of the Soviet Union in 1991. The list of those cutting ties or reviewing their operations is growing by the hour as foreign governments ratchet up sanctions against Russia, close airspace to its aircraft and lock some banks out of the SWIFT money messaging system. With the ruble plunging and the U.S. banning transactions with the Russian central bank, operating in Russia has become deeply problematic. Some companies have concluded that the risks, both reputational and financial, are too great to continue. For some companies, the decision to exit Russia is the conclusion of decades of lucrative, if sometimes fraught, investments. Foreign energy majors have been pouring money in since the 1990s. Russia’s largest foreign investor, BP Plc, led the way with its surprising announcement on Sunday that it would exit its 20% stake in state-controlled Rosneft, a move that could result in a $25 billion write-off and cut its global oil and gas production by a third.
  • Kohl’s Corp. posted weaker-than-expected sales in its fiscal fourth quarter but gave an outlook that was rosier than expected. Shares rose. The retailer expects full-year earnings per share to be in the range of $7 to $7.50, higher than the estimate of $6.54 compiled by Bloomberg. Kohl’s sees net sales increasing 2% to 3% in fiscal 2023 from the prior year, and operating margin in the range of 7.2% to 7.5%. Net sales of $6.22 billion in the quarter ended Jan. 29 came in lower than the $6.53 billion average estimate from analysts. The closely watched gauge of gross margin was 33.2%, higher than the estimate of 32.1%.
  • Telecom Italia SpA is seeking to get KKR & Co. to scrap a 10.8 billion-euro ($12.1 billion) takeover bid for the company by involving the U.S. private equity giant in an in-house plan to spin off its landline network, people familiar with the matter said. The phone carrier, which has internally valued the bid as too low and lacking enough value-creation, instead wants to involve KKR in a plan to spin the landline network off into a new unit called NetCo, said the people, asking not to be named since the discussions aren’t public.  The counter-proposal would still allow KKR to strengthen its grip over Telecom Italia’s landline network once it’s separated, the people said. No final decision has been taken on the plan, which remains preliminary, they said. KKR already owns 37.5% of the Telecom Italia secondary grid running from street cabinets to premises.
  • Bitcoin advanced amid mounting signs that the war in Ukraine is bolstering demand for cryptocurrencies.  The largest cryptocurrency rose 4.3% to $43,453 at 10:50 a.m. in London, gaining along with other major digital tokens. A fresh wave of turbulence hit global markets on Tuesday as the conflict in Ukraine intensified amid mounting penalties against Russia, as stocks in Europe fell along with U.S. equity futures. Bitcoin’s outperformance amid the volatility has some bulls pointing to a break from the narrative that crypto is just another risk asset. Adam Farthing, chief risk officer for Japan at crypto trading firm B2C2, said Bitcoin could “de-link from risk” and start trading more like a hedge to geopolitical instability and inflation.

“Keep your face always toward the sunshine – and shadows will fall behind you.” -Walt Whitman

*All sources from Bloomberg unless otherwise specified