March 16, 2022

Daily Market Commentary

Canadian Headlines

• Healthcare of Ontario Pension Plan returned 11.3% last year, as gains in equities dwarfed a small loss in bonds, but its top executive warned that 2022 may be a difficult one for investors. “It’s been a pretty rough start of the year,” Chief Executive Officer Jeff Wendling said in an interview. “We’ve seen the equity markets come off substantially. We’ve seen fixed-income markets sell off. So I think it’s quite likely that we’re going to see probably more muted returns.” The fund earned the strongest returns from private-equity investments, which made 23.7% last year, Hoopp said in a statement. About two-thirds of those holdings are in funds, Wendling said, and the rest is direct or co-investments. Hoopp expects to make more of its private investments directly in the future, he said.

World Headlines

• European equities jumped on Wednesday, as tentative signs of optimism in the talks between Russia and Ukraine and a China state council pledge to keep the stock market stable revived global risk appetite ahead of a crucial Federal Reserve meeting. The Stoxx 600 Europe Index advanced by 2.4% as of 10:39 a.m. in London, extending its gains after Kremlin spokesman Dmitry Peskov said a Ukrainian proposal to become a neutral country but retain its own armed forces “could be viewed as a certain kind of compromise.” Technology and consumer products sectors led the gains, while energy and utilities underperformed. Equity markets across the world have been roiled by a confluence of headwinds — from hawkish central banks to Russia’s invasion of Ukraine that triggered a wave of sanctions against one of the bedrocks of global commodity supplies, to fears over a regulatory crackdown targeting Chinese tech behemoths. Following a protracted rout that pushed major indexes deep into correction territory, optimism is growing that most negative news may now be priced in.
• Stocks rallied as oil tumbled and a widely watched manufacturing-gauge came in much weaker than expected, easing fears about more aggressive Federal Reserve tightening that could stifle economic growth. Beaten-down tech shares led gains in the S&P 500, with the Nasdaq 100 outperforming after a plunge of more than 20% from a record. West Texas Intermediate crude sank below $100 a barrel amid signals that Iran nuclear talks may resume, paving the way for more oil supply to come into the market while intensifying lockdowns in China introduced risks to global demand. Treasury two-year yields were little changed ahead of the Fed’s policy decision. Prices paid to U.S. producers rose strongly in February, underscoring inflationary pressures that will likely set the stage for the Fed’s first rate hike since 2018 on Wednesday. Still, officials will have to balance curbing higher prices without crashing the economy into a recession. A separate report Tuesday showed New York state manufacturing activity weakened considerably in early March as orders fell and delivery times lengthened.
• Stocks across Hong Kong and China staged a stunning rebound after China’s state council vowed to keep its stock market stable amid a historic rout that erased $1.5 trillion in value over the past two sessions. The Hang Seng China Enterprises Index, which tracks mainland companies listed in Hong Kong, jumped 13% on Wednesday, its biggest gain since the global financial crisis. A gauge of Chinese tech firms soared by a record with Alibaba Group Holding Ltd. and Tencent Holdings Ltd. gaining more than 23%. The eye-watering rally followed a report by the official Xinhua news agency that China will keep the stock market stable and support overseas share listing, citing a meeting chaired by Vice Premier Liu He. The comprehensive statement also sought to resolve other woes that have plagued the market, particularly concerns over Beijing’s tech crackdown, saying efforts to “rectify” internet platform companies should end soon.
• Oil swung between gains and losses after the Kremlin hinted at progress in peace negotiations. Futures in London fell as much as 1.7% to near $98 a barrel, after earlier rallying close to $104. Russia said a Ukrainian proposal to become a neutral country but retain its own armed forces could be viewed as a compromise. The comments came after the International Energy Agency said Russian output could fall by a quarter next month. That assessment of reduced supply came alongside sharp reductions to the agency’s oil demand estimates for this year as a result of high prices. China is battling a new Covid wave and traffic in Shanghai is less congested in just one sign of the looming hit to the country’s demand.
• Gold was steady after three days of declines, with investors waiting for a Federal Reserve meeting where policy makers are set to raise interest rates. Bullion is trading near a two-week low after rallying to within $5 of a record last week, when Russia’s invasion of Ukraine stoked fears of low growth and higher inflation. Commodity prices have since fallen — driven by fresh lockdowns in China — easing concerns the global economy could slip into stagflation. Gold “seems to be very rationally pricing in the status quo of the war and its economic consequences: the West’s strong resistance to actively get involved and a less pronounced or less-than-feared pick-up in inflation,” Carsten Menke, head next generation research at Julius Baer Group Ltd., wrote in a note.
• The London Metal Exchange froze electronic trading in nickel immediately after it restarted from a week-long suspension, after a systems glitch allowed prices to plunge past a new daily limit that was supposed to help restore order following last week’s historic short squeeze. The forced halt is an embarrassing setback for the 145-year-old exchange, which is the world’s main venue for setting prices and trading some of the most important industrial metals. The turmoil in nickel has plunged the metals industry into chaos and the LME was already facing widespread anger for its decisions to suspend the market and cancel several hours of trades last week after a massive price spike. Trading briefly restarted at 8 a.m. on Wednesday and nickel futures immediately fell through the 5% daily limit before the market was suspended again. The exchange said it halted electronic trading to investigate the problem and will cancel a “small number” of transactions. Phone-based trading remains open and brokers in the open-outcry floor known as “the Ring” will also trade nickel later today.
• The Federal Reserve is poised to raise interest rates Wednesday for the first time since 2018, with investors focused on how aggressive central bankers plan to be in tackling the hottest inflation in four decades. The Federal Open Market Committee is all but certain to raise rates by a quarter percentage point at the conclusion of its two-day policy meeting, after Chair Jerome Powell told lawmakers earlier this month that he favored such a move. The panel will release a statement and forecasts, including the “dot plot” chart that displays central bankers’ projections on interest rates, at 2 p.m. in Washington. Powell will hold a virtual press conference 30 minutes later
• The Pentagon will request 61 F-35s in its next budget, 33 fewer of the stealth jets from Lockheed Martin Corp. than previously planned, according to people familiar with the spending blueprint. The U.S. Defense Department had planned to fund 94 of the fighters in fiscal 2023, up from the 85 in this year’s budget, according to the most recent “Selected Acquisition Report” on its costliest program. The proposed reduction for the F-35 may be the most controversial procurement item in a national security budget request that’s expected to top $770 billion for the year that begins Oct. 1.
• North Korea’s latest missile test appeared to have “failed” shortly after launch, South Korea’s military said, with the incident coming days after reports indicated that Kim Jong Un’s regime was preparing to fire its first ICBM since 2017. The unidentified projectile appeared to have been launched at 9:30 a.m. Wednesday from an area near Pyongyang’s international airport, the Joint Chiefs of Staff said. The rocket seems to have exploded before reaching an altitude of 20 kilometers (12 miles), the Yonhap News Agency reported separately, citing an unidentified South Korean military official. The rocket was launched from the same area where North Korea had in recent weeks reported test-firing satellite systems, which the U.S. said were actually part of an effort to develop a new intercontinental ballistic missile. South Korean authorities were undergoing additional analysis on the specifications of the missile tested Wednesday, a senior JCS official told reporters.
• Pfizer Inc. said it has asked U.S. regulators for clearance of an additional Covid-19 booster shot for seniors, in a bid to protect vulnerable adults as immunity provided by the first three doses wanes.  The New York-based drugmaker and its German partner BioNTech SEsaid on Tuesday that they have sought an emergency-use authorization from the Food and Drug Administration for a second booster of their vaccine, Comirnaty, for people 65 and older who have already received a booster of any of the authorized Covid-19 vaccines.  Pfizer and BioNTech said they submitted data to the FDA from Israel, which began offering a fourth shot to older people and health-care workers last year as the omicron variant was circulating. The real-world data showed a fourth shot given at least four months after the third reduced the rate of infection and severe illness compared to those who were given just one booster shot, according to an analysis of Israeli Ministry of Health records for over 1.1 million adults 60 and older with no known history of Covid infection.
• Companies are pressing the government to maintain a steady supply of spectrum to meet the booming U.S. demand for wireless technology. Congress, the Federal Communications Commission, and Commerce Department’s National Telecommunications and Information Administration need to release new spectrum bands, industry groups plan to tell a House Energy and Commerce subcommittee Wednesday. Representatives from Cisco Systems Inc. and Intel Corp., among others, will testify. The U.S.’s finite spectrum supply, used for radio, satellite, and wireless internet services, is increasingly crowded. Cellphone use in the U.S. has more than tripled since 2016, topping 42 trillion megabytes in 2020, according to a survey from CTIA, an industry trade group, released last year. The federal government has been forced to make tough decisions about access, including balancing the needs of aviation and cellphone companies in the rollout of 5G.
• Boris Johnson began a visit to the United Arab Emirates and Saudi Arabia to try to persuade the OPEC members to step up oil production and help lower energy prices following Russia’s invasion of Ukraine. The British prime minister met Crown Prince Mohammed bin Zayed, the UAE’s de facto ruler, in Abu Dhabi on Wednesday morning, and will travel later in the day to Riyadh for a meeting with Saudi Crown Prince Mohammed bin Salman. The war in Ukraine and sanctions on Russia have roiled energy markets, driving crude prices above $100 a barrel and ratcheting up pressure on the Organization of Petroleum Exporting Countries to raise output. The U.K. government has said the Middle East trip is part of a broader effort to reduce Europe’s dependence on Russian energy and hurt President Vladimir Putin. The U.K. plans to phase out Russian oil imports by year-end.
• Norway increased how much natural gas companies can pump from key fields to keep production at full tilt through the summer, when output usually falls, to meet demand following Russia’s invasion of Ukraine. The Petroleum and Energy Ministry approved the revisions for the Oseberg, Troll and Heidrun fields to facilitate efforts by oil and gas companies to maintain the current high level of production, the ministry said in a statementon Wednesday. The move will allow Norway, Europe’s second-largest gas supplier, to maintain flows through the summer when maintenance would normally lead to lower output. The country is already pumping flat out after a blistering surge in prices, with the government previously approving higher production from the key Troll and Oseberg fields.
• A proposal for Ukraine to become a neutral country but retain its own armed forces “could be viewed as a certain kind of compromise,” Kremlin spokesman Dmitry Peskov said Wednesday, hinting at possible progress in peace negotiations. Peskov declined to provide details beyond confirming that the idea of Swedish or Austrian-style neutrality is under discussion in the talks now underway between Russia and Ukraine to try to end the war that’s now in its 21st day.  Only a “Ukrainian” model with enforceable security guarantees is acceptable to Kyiv, Ukrainian presidential adviser Mykhaylo Podolyak said by text message. “This means that the signatories do not stand aside in case of attack against Ukraine as they do now.”
• Tesla Inc. is suspending production at its Shanghai factory for two days as China tightens restrictions to contain the latest Covid outbreak, according to people familiar with the matter. Production at the plant will be halted on Wednesday and Thursday, the people said, asking not to be identified because they’re not authorized to speak publicly. Covid restrictions in the city have prevented many workers from commuting to the factory, one of the people said. Elon Musk’s electric carmaker is the latest multinational to be caught up in China’s widening lockdowns and Covid restrictions. Although Shanghai has ruled out imposing a broad lockdown for now, workers in its main financial and business district have been urged to work from home as officials try to rein in a swelling outbreak.
• South Koreans’ love of complex derivatives products has raised the specter of multi-billion dollar losses on investments linked to the Hang Seng China Enterprises Index, which this week plunged by the most since the global financial crisis. There are at least 16 trillion won ($12.9 billion) of products tied to the gauge of Chinese firms listed in Hong Kong that have yet to mature, according to the Korea Securities Depository.  While the depository data doesn’t tally the potential losses, a 50% decline from specific index reference points is a trigger that wipes out much or all of an investor’s principal in many cases, according to analysts.
• Asset manager Neuberger Berman has collected $1.95 billion for a debut fund to sponsor special-purpose acquisition companies, or SPACs, alongside CC Capital Partners, a private investment firm formed and led by ex- Blackstone Inc. dealmaker Chinh Chu. An affiliate of Koch Industries anchors the vehicle, called Neuberger Berman Opportunistic Capital Solutions Fund, a spokesman for the company confirmed. The fund had an initial target of $1.5 billion, a February 2020 regulatory filing shows. Neuberger and CC Capital agreed in 2020 to form a series of SPACs with the new fund acting as a co-sponsor with CC Capital. SPACs — also known as blank-check companies — begin as shell organizations formed to raise capital through an initial public offering to invest in private businesses and bring them public in what is often called a reverse merger.
• China made a strong push to stabilize battered financial markets, promising to ease a regulatory crackdown, support property and technology companies and stimulate the economy. The government should “actively introduce policies that benefit markets,” according to a meeting of China’s top financial policy committee led by Vice Premier Liu He, the country’s top economic official. That vow to take investors interests into account comes after a sell-off in domestic shares due to fears over growth risks and tough regulation of real estate and internet companies. The meeting offered investors re-assurance that a sweeping crackdown on internet companies was nearing its end and that the government would prevent a disorderly collapse in the property market. China’s banking regulator said after the meeting that it would support insurance companies to increase investment in stock markets.
• Barclays Plc’s new boss C.S. Venkatakrishnan is keeping a close eye on risks as Russia’s war rattles markets and cools dealmaking. “Volatility is a good thing, but you must be careful what you wish for,” the CEO told a Morgan Stanley conference Wednesday. “And you’ve got to be very prudent and very watchful and be on high alert. Through this quarter, we sort of manage day to day with a lot of attention to managing our risks.” Venkat, who took the helm in November after joining Barclays in 2016 as chief risk officer, said large-scale deals and initial public offerings had slowed as investors weigh up the far-reaching consequences of the Ukrainian invasion. “The deal volume, both equity and debt capital markets, has shrunk compared to a year ago,” he said.
• JPMorgan Chase & Co. is selling bonds in Europe, marking the first such sale by an American bank since Russia’s invasion of Ukraine last month. The New York-headquartered lender has opened books on euro-denominated notes, according to a person familiar with the matter, who asked not to be named as they aren’t authorized to speak publicly. It’s only the second euro offering from a U.S. lender in 2022, after a Goldman Sachs Group Inc. sale on Feb. 1, according to data compiled by Bloomberg. Goldman’s 2.25 billion euros ($2.47 billion) two-part offering came before the start of war in Ukraine spurred a collapse in sales from American lenders amid a broader market slump. The two sales stand in sharp contrast to 2021, when both banks along with Morgan Stanley and Bank of America Corp had priced 8.75 billion euros at this point.
• Russia’s oil output may slump by about a quarter next month, inflicting the biggest supply shock in decades as buyers shun the nation’s exports following its invasion of Ukraine, the International Energy Agency said. “The implications of a potential loss of Russian oil exports to global markets cannot be understated,” the Paris-based agency said in its monthly report on Wednesday. “While it is still too early to know how events will unfold, the crisis may result in lasting changes to energy markets.” Sanctions on trade with Moscow and widespread condemnation of its aggression have rendered Russian oil almost untouchable to traders, with companies from TotalEnergies SE to Shell Plc pledging to curtail purchases. International crude prices rocketed to a 13-year high near $140 a barrel last week, though have since pulled back sharply.
• Airbnb Inc. managed to withstand a global pandemic and come out the other side in better shape, as people re-imagined their work-life balances with the flexibility to ditch offices for the mountains or coastal towns.  But that success wasn’t a guarantee. During the early days of the pandemic, the vacation-rental company lost 80% of its business in eight weeks.  “I’ve never had a near-death experience, thankfully, in my life, although I’ve heard it being described,” Chief Executive Officer Brian Chesky said in an interview on “The David Rubenstein Show: Peer-to-Peer Conversations.” “A version of that happened from a business sense. It was almost like our business flashed before our eyes.”
• Brazil’s central bank will likely slow the pace of interest rate increases as it calibrates one of the world’s most aggressive monetary tightening cycles despite a breakneck surge in local fuel prices. Policy makers will raise the benchmark Selic by 100 basis points to 11.75% on Wednesday, according to 38 of 43 economists in a Bloomberg survey. Three of them expect a boost of 125 basis points, while the others foresee a fourth straight hike of 1.5 percentage points.  The bank led by Roberto Campos Neto is struggling with with annual inflation above 10% that is likely to last longer than initially thought. Price gain expectations leaped after state-controlled Petrobras raised diesel costs by as much as 25% last week, following oil’s spike in international markets. That’s an additional problem for Brazil’s stalled economy, with gross domestic product likely to grow just 0.5% this year, partly due to the aggressive tightening campaign that isn’t over yet.

*All sources from Bloomberg unless otherwise specified