March 28, 2023

Daily Market Commentary

Canadian Headlines

  • Finance Minister Chrystia Freeland plans to expand Canada’s investment subsidies for the oil and hydrogen sectors and allocate C$2 billion ($1.5 billion) to a fund for cutting emissions from heavy industry. The money is part of a plan by one of the world’s largest oil producers to accelerate the growth of clean technology. Freeland’s budget, to be unveiled Tuesday in Ottawa, will include a mix of tax credits and cash incentives for business, according to people familiar with the document who spoke on condition of anonymity. Canada is the most important foreign supplier of oil to the US and has the world’s third-largest crude reserves, but most of it is trapped in thick oil sands in northern Alberta, requiring huge amounts of energy to extract and upgrade. That’s a challenge for Prime Minister Justin Trudeau’s government, which has set a goal of cutting emissions by the end of this decade to 40% below 2005 levels, but can’t afford to cut off a vital source of resource wealth.
  • Lundin Mining overnight Monday said that it has entered into a binding purchase agreement with JX Nippon Mining & Metals Corp. and certain of its subsidiaries to buy 51% of the issued and outstanding equity of SCM Minera Lumina Copper Chile, a wholly owned subsidiary of JX that operates the Caserones copper-molybdenum mine in Chile. Lundin will provide JX with an upfront cash payment of $800 million, and a $150 million in deferred cash consideration will be payable in installments over a six-year period after the closing date. Lundin Mining will also have the right to buy up to an additional 19% interest in Caserones for $350 million over a five-year period starting on the first anniversary of the date of closing.

World Headlines

  • European stocks gave up gains to trade little changed as investors monitored developments in the banking sector and focused on central banks’ policy outlook given fears of a possible recession. The Stoxx 600 index was flat by 11:41 a.m. in London, paring an earlier advance of as much as 0.8%. Banking stocks, which outperformed at the open, erased gains after news that France’s financial prosecutor was searching five lenders as part of a probe into tax fraud and money laundering. Societe Generale SA dropped as it said its French headquarters are among those being scrutinized. After outpacing their US peers at the end of last year and the start of 2023, European stocks are lagging this month as turmoil in a slate of US regional lenders and Credit Suisse Group AG has fueled a rotation out of value and cyclical shares that had boosted the region’s market. The banking sector has lost its appeal as a top bet this year with investors rotating into sectors that are perceived as defensive, such as consumer staples, utilities and health care.
  • US futures and European stocks struggled for direction as investors awaited data for clues on monetary policy and assessed developments in the banking sector. Treasuries fell. Contracts on the S&P 500 were little changed, while those on the Nasdaq 100 dropped. Traders began this week on a bullish note, ahead of a busy calendar for economic reports and speeches by Federal Reserve officials. Still, Tuesday’s moves suggest lingering caution after turmoil in the banking sector fueled worries of recession and wider contagion earlier this month. A report on the Fed’s preferred measure of inflation later this week will be closely watched, while data on consumer confidence is due today.
  • Asian stocks gained as a lull in new developments in the banking sector gave investors a chance to adjust positions and assess whether the Federal Reserve will lower rates to buttress the US economy. The MSCI Asia Pacific Index rose as much as 0.9%, halting a two-day losing streak. A sub-gauge of financial shares jumped more than 1% as they followed US peers higher. Australia, Japan and South Korea advanced. Hong Kong’s Hang Seng Index gained about 1%, while China’s mainland indexes fluctuated. Asia’s regional equity gauge has climbed more than 2% over the past week as US bank shares regained their footing after tumbling last week and fanning fears of a looming economic slowdown. Doubleline Capital’s Jeffrey Gundlach said on CNBC that he expects a US recession to start in a few months, and that the Federal Reserve will need to respond “very dramatically.”
  • Oil extended its biggest rally of the year as a clash between Iraq and its Kurdish region curtailed exports, while fears over a fallout from the banking crisis receded. West Texas Intermediate futures rose as much as 1%, after jumping above 5% on Monday in the steepest surge since October. A legal dispute between Iraq, its semi-autonomous region of Kurdistan and Turkey have halted around 400,000 barrels a day of flows from Ceyhan port. Meanwhile, optimism that the worst of the banking turmoil may be over is driving up broader markets. Oil nonetheless remains on track for a fifth monthly decline following concerns over a potential US recession and resilient Russian energy flows. Most market watchers are still betting that China’s recovery will accelerate and boost prices later this year, with a top producer in the country forecasting a surge in demand.
  • Gold held a two-day decline as easing concerns over the strength of the banking sector reduced demand for a haven. Bullion prices eased since the end of last week as swift action from US and Swiss authorities calmed fears about a full-blown crisis. US and European stock markets have climbed in recent days, with havens coming under pressure. Spot gold lost 0.2% to $1,952.64 an ounce as of 9:47 a.m. in London. It slumped more than 1% on Monday. The Bloomberg Dollar Spot Index edged lower. Silver, platinum and palladium fell.
  • Over the course of a generation China has become the world’s biggest sovereign lender to developing economies as part of a push for business and influence that mirrors the 20th century spread of US economic power. Now comes the next chapter: With a growing list of poor countries facing debt problems, China is drawing on its enormous central bank reserves to establish itself as a source of emergency funds to bail out some of the very nations it spent years lending to. In a new study that offers a rare look at how the People’s Bank of China (PBOC) wields its $3.3 trillion arsenal, a group of leading economists document at least $240 billion in assistance that Beijing has funneled into 22 countries including Argentina, Pakistan and Nigeria since 2000. To the authors it amounts to “a new global system for cross-border rescue lending to countries in debt distress” that rivals the US-led frameworks in place since the 1940s. It’s also turning the PBOC into an influential lender of last resort at a time of growing rivalry between the US and China.
  • Credit Suisse Group AG’s top executives in Switzerland sought to reassure local clients over worries stemming from the takeover by UBS Group AG, and underlined the importance that the domestic business has for the new combined bank. The Swiss bank held a 45-minute webcast at 8.a.m local time on Tuesday, hosted by Andre Helfenstein, chief executive of the Swiss business, and Roger Suter, head of private banking Switzerland. The executives apologized to clients who’d had difficulty joining the webcast due to capacity constraints.  Earlier this month UBS agreed to buy Credit Suisse for 3 billion francs ($3.3 billion) in a deal brokered by the Swiss government, after the historic lender saw a collapse in confidence after years of management missteps and scandals. The combined entity is set to have a commanding presence in the domestic market, despite calls for a spin-off of the Swiss bank to preserve competition.
  • Prices in UK stores are rising at a record pace in a sign that the cost-of-living crisis is far from over. The British Retail Consortium said shop price inflation accelerated to 8.9% this month, a fresh peak for an index that started in 2005, and an increase from 8.4% in February. The inflationary crunch has prompted shoppers to buy fewer items, according to one of the country’s best-known online grocers. Ocado Group Plc said Tuesday morning that the average number of items purchased per customer at its tie-up with Marks & Spencer Group Plc fell by 7.5% in the first quarter.
  • Albemarle Corp., the world’s top lithium producer, has had its A$5.5 billion ($3.7 billion) cash offer for Liontown Resources Ltd rejected by the Australian developer, sending shares in the target up almost 70% and fueling expectations of wider consolidation. The mining giant had offered to acquire all of Liontown’s equity at A$2.50 a share, its third bid in five months, the Perth-based company said on Tuesday. The proposal, a 64% premium to Monday’s closing price, comes after a slump in lithium prices from last year’s record and a corresponding drop in Liontown’s share price. Liontown owns one of the most promising early-stage lithium projects in Australia, the world’s top exporter of the battery metal, and has supply agreements with major automakers including Tesla Inc. and Ford Motor Co. Explaining its decision to knock back Albemarle, it cited a forecast fivefold growth in global lithium demand by 2030 and a predicted supply deficit.
  • A bipartisan group of senators have sent a letter to Federal Reserve Chair Jerome Powell questioning whether the central bank exercised its full legal authority to oversee Silicon Valley Bank and other midsized financial institutions. The five lawmakers, including Bob Menendez, a New Jersey Democrat, and Mike Rounds, a South Dakota Republican, are members of the Senate Banking Committee. In the letter, a copy of which was obtained by Bloomberg, they asked whether the Fed used its powers under federal law to apply an “enhanced supervision and prudential standard” for Silicon Valley Bank or any bank with between $100 billion and $250 billion in assets.
  • Lyft Inc. tapped David Risher to be its new chief executive officer, replacing co-founder Logan Green and setting the stage for a potential sale as the ride-hailing company struggles to compete with bigger rival Uber Technologies Inc. Green, and co-founder and current President John Zimmer will step back from daily operations after more than a decade with the company but remain on the board, Lyft said in a statement on Monday. Risher, 57, who has been a Lyft board member since 2021, has held previous roles as head of product at Inc. and as a general manager at Microsoft Corp. before launching his own startup called Worldreader. He will take over on April 17. “The decision suggests that Lyft is in a tough competitive position, given operational challenges vs. larger rival Uber,” wrote Bloomberg Intelligence analyst Mandeep Singh. “Amid a risk of cash burn and market-share loss, we think Lyft may explore strategic options, including a sale.”
  • In the battle for the biggest prize in China’s trillion-dollar pension market, BlackRock Inc. and other global firms have little chance of attracting clients like Judy Deng. On New Year’s Eve, the logistics executive tapped on her phone to deposit 12,000 yuan ($1,700) into a new pension account at her local bank in Shanghai. Deng, 46, never considered investing with global asset managers. “You need a very strong reason to pick a foreign company,” she said, calling the global giants “very unfamiliar” names. “I don’t even know which country they’re from.” China launched private pension plans for the first time last year and Beijing has ensured that domestic banks and fund managers win the vast majority of the new business in a market that may eventually grow to $1.7 trillion. Global companies including BlackRock and Fidelity International Ltd have been off to a slow start.
  • The Federal Reserve will keep raising interest rates despite traders betting otherwise as fears of a banking crisis convulse markets, according to BlackRock Inc. The world’s biggest money manager favors inflation-linked bonds — securities that offer protection from rising prices — on the view markets are wrong in expecting imminent US rate cuts as the economy lurches toward a recession. This time is different as the Fed and its peers have made clear that troubles buffeting the banking sector won’t halt their battle against inflation, BlackRock Investment Institute strategists including Wei Li wrote in a client note. BlackRock’s view clashes with those of TD Securities and DoubleLine Capital LP, who say the Fed is mistaken about the need to keep raising interest rates as the risk of recession grows. The collapse of several US banks and Credit Suisse Group AG this month are forcing a global rethink on the outlook for monetary policy, while triggering the biggest swings in Treasury yields in more than a decade.
  • The European Union is targeting a way for member states to have the option to effectively ban Russian shipments of liquefied natural gas without implementing new energy sanctions. The bloc’s energy ministers are poised to endorse a proposal that would give member governments the ability to temporarily prevent Russian exporters from up-front booking of infrastructure capacity needed for the shipments, according to a document seen by Bloomberg News. While individual governments would still need consultations, including with other EU countries and the European Commission, to employ the mechanism, the tool could continue to reduce the flow of energy products from Russia.
  • UK school leaders rejected a government pay offer and 133,000 civil servants announced plans to strike, dealing a blow to Prime Minister Rishi Sunak’s government as it seeks to draw a line under months of industrial action. The large-scale walkout by government workers is planned for April 28, the culmination of a month of proposed industrial unrest, the PCS union said late Monday in a statement. The union also announced six days of strikes in the middle of the month by workers for the energy regulator, Ofgem. The action was announced just before the NEU — the biggest of four education unions talking with the government — said it would recommend its members reject a new pay offer for teachers and other staff in England. Two other unions, the ASCL and NAHT, said they were considering the matter.
  • Alibaba Group Holding Ltd. plans to split its $220 billion empire into six units that will individually raise funds and explore initial public offerings, the biggest overhaul of China’s online commerce leader since its inception more than two decades ago. The move frees up the Chinese company’s main divisions from e-commerce and media to the cloud to operate with far more autonomy, laying the foundation for future spinoffs and market debuts. Its shares climbed 8% in pre-market trading in New York. The shift to a holding company structure is rare for major Chinese tech firms and could present a template for Alibaba’s peers. Decentralizing the company’s business lines and decision-making power addresses one of Beijing’s primary goals during its sweeping crackdown on the technology sector.
  • France’s financial prosecutor raided some of France’s biggest banks, including Societe Generale SA and BNP Paribas SA, as part of a probe into tax fraud and money laundering related to dividend payments.  HSBC Holdings Plc, Natixis SA and BNP’s Exane unit are also being searched as part of the investigation, according to the prosecutors office in Paris. Preliminary investigations related to the raids were opened in December 2021, the prosecutor said. The raids relate to a dividend arbitrage strategy known as cum-cum where shareholders transferred stock for a short period to investors based abroad to avoid a dividend tax. Investors held the shares during the period when dividends were paid out and either weren’t taxed or taxes were refunded. They then sold the securities back to the original owner and the amount saved was split between the parties.
  • French unions are holding a new day of nationwide strikes Tuesday to try to force President Emmanuel Macron to reverse his decision to push through unpopular pension reforms. As concerns grow over mounting violence, labor organizations have blamed the government for creating an explosive situation. Protests on Thursday ended in chaos, with hardcore fringes clashing with riot police. Further scuffles have taken place in the days since. The backlash against raising the minimum retirement age by two years to 64 has escalated since Prime Minister Elisabeth Borne said on March 16 that Article 49.3 of the constitution would be used to avoid a vote on the bill in the National Assembly.