March 29, 2023

Daily Market Commentary

Canadian Headlines

  • Finance Minister Chrystia Freeland is planning to raise billions of dollars from banks and insurance companies by changing the tax rules for dividends they get from Canadian firms. In a measure that officials billed as closing a loophole, Canada will begin treating dividends received by financial institutions from holding domestic shares as business income. It’s expected to bring in C$3.2 billion ($2.3 billion) over five years, starting in 2024. Banks and other financial firms have used complex tax planning for years to effectively exclude these dividends from their income, lowering their overall tax burden. The new tax will apply to shares that are held as mark-to-market assets — not to dividends paid from one subsidiary to another. The measure won’t affect shares held by financial institutions on behalf of clients. The change comes as Prime Minister Justin Trudeau’s government faces a deteriorating fiscal outlook and slowing economy, while it ramps up spending to help residents cope with inflation, prop up the health-care system and compete with the US on low-carbon initiatives. The government abandoned plans to balance the budget by 2028 and intends to run larger deficits every year until then.

World Headlines

  • European equities advanced as fears around the health of the banking sector continued to subside and investors rotated into technology shares. The Stoxx 600 added 0.9% by 10:50 a.m. in London. Tech stocks outperformed after Alibaba announced plans to split into six units that will individually raise funds and explore listings, and after upbeat forecasts from Infineon Technologies AG and Micron Technology Inc. Consumer products advanced and real estate stocks saw a bounce after underperforming all other sectors this month on recession and high leverage fears. European equity markets trading spiked this month to volumes last seen when Russia invaded Ukraine, peaking at €76 billion the Friday before Credit Suisse Group AG’s takeover, according to Bloomberg Intelligence analysts. Volume has normalized but March has shown how sensitive markets are to any potential risks.
  • Stocks rose with US index futures as a rally in Chinese tech shares boosted sentiment and concern about contagion from banking turmoil continued to wane. Treasuries rose after a two-day selloff as investors awaited remarks from Federal Reserve officials and economic releases this week for clues on monetary policy. In particular focus will be data on the central bank’s preferred measure of inflation — the so-called core PCE deflator — which is likely to factor into the Fed’s next policy decision. Investors are assessing risks of recession and the trajectory of central-bank policy after banking turmoil earlier this month sparked fears of wider contagion. An index of dollar strength was steady after ending Tuesday near the lowest level in eight weeks.
  • Asian stocks advanced as Chinese tech shares rallied on optimism Alibaba’s overhaul will pave the way for other tech giants to potentially unlock billions of dollars in shareholder value. The MSCI Asia Pacific Index rose as much as 0.8%, led by Hong Kong. Chinese technology stocks climbed 2.5% to a five-week high. Alibaba jumped 12%, while its biggest shareholder Softbank Group gained more than 6%. Alibaba surprised markets after the internet behemoth announced plans to split its $220 billion empire into six units that will individually raise funds and explore initial public offerings. The plan is positive for the sector and could signal further easing of regulatory constraints, according to analysts.
  • Oil extended gains as Iraqi exports via Turkey remain disrupted amid a dispute with Kurdish authorities, while an industry report showed a decline in US stockpiles. Brent crude traded above $79 a barrel, while West Texas Intermediate topped $74. Both benchmarks rose to their highest level in two weeks. Oil has been buttressed by factors including supply risks and resurgent demand from China as the nation recovers from pandemic lockdowns. Still, uncertainty continues to weigh on the market, following a banking crisis that has hit institutions in both the US and Europe.
  • Gold declined as buoyant mood in equity markets continued to undermine the haven asset. Spot gold fell 0.5% at $1,963.40 an ounce as of 9:27 a.m. in London. The Bloomberg Dollar Spot Index strengthened 0.2% after Tuesday’s 0.4% decline. Silver, platinum and palladium slid.
  • Treasury Secretary Janet Yellen said the Biden administration’s proposed spending on international aid and investment programs, exemplified by assistance for Ukraine, would strengthen Washington’s leadership abroad and advance US security interests. “There is perhaps no place where our impact is felt more acutely than in Kyiv,” Yellen says in prepared remarks she’s scheduled to deliver beginning at 10 a.m. Wednesday to a subcommittee of the House Appropriations Committee. “In my trip to Ukraine last month, I heard personally about how our coalition’s work has enabled Ukraine to defend itself against a brutal and illegal assault by Russia,” she said. On that trip, Yellen met with President Volodymyr Zelenskiy and Prime Minister Denys Shmyhal. She also visited teachers and administrators at a school damaged by a missile strike in the first month of the war. Their salaries are financed with direct budgetary assistance from the US.
  • Airbus SE said that it will no longer pursue a minority holding in Atos SE’s Evidian, ending a bid to buy a stake in the spinoff of its cybersecurity, cloud and supercomputing businesses. Acquiring a 29.9% stake in Evidian “does not meet the company’s objectives in the current context and under the current structure,” an Airbus spokesman said in an emailed statement on Wednesday. The companies will continue to discuss other potential options, it said. The offer had been criticized by some Airbus shareholders after it was disclosed last month. TCI Fund’s Chris Hohn said the purchase would represent an “extremely inefficient” use of funds and distract management at a time when it needs to focus on meeting delivery targets. French media BFM previously reported that Airbus wanted to renegotiate the price of Evidian. Airbus didn’t want to invest €1.2 billion ($1.3 billion) in Evidian without controlling it, according to the report, which cited unidentified people close to the aviation giant.
  • China warned the US and Taiwan President Tsai Ing-wen that any meeting with House Speaker Kevin McCarthy would be a serious provocation, raising the stakes for her trip to the US. Tsai left Taipei on Wednesday bound for New York on a plane that was guarded by F-16 fighters as it headed over the Pacific. She’ll later visit two Central American allies, and on the way home she’s planning to stop in Los Angeles, where she’s expected to meet with McCarthy. “We resolutely oppose this and will definitely take measures to respond,” Zhu Fenglian, spokeswoman for China’s Taiwan Affairs Office, said at a regular press briefing in Beijing, when asked about the potential meeting. She gave no further details.
  • The yen is making a comeback as a preferred foreign-exchange haven, after banking crises in the US and Switzerland hurt the dollar and franc’s standing as go-to assets for turbulent times. It’s a change of fortunes for the Japanese currency, which only a few months ago needed the support of policymakers to revive it from a three-decade low. It’s the world’s best-performing major currency this month and for the likes of DWS Group, JPMorgan Chase & Co. and Morgan Stanley, the yen is the next big trade. The yen’s resurgence shows how sentiment can turn on a dime as the global rate-hiking cycle looks to be approaching an end. Its strength has wrong-footed hedge funds betting against the yen and Wall Street now favors it as a hedge against further shocks to the world economy.
  • Russia said top agricultural commodities trader Cargill Inc. will stop exporting its grain, the strongest move yet by a major Western crop merchant to pull back from the country. As the biggest wheat exporter, Russian shipments are vital to global crop trade and food supplies. A bumper harvest there last year helped wheat futures drop more than 40% from a record reached just after Moscow’s invasion of Ukraine. While Cargill is a big exporter of Russian wheat, the government said the firm’s decision shouldn’t affect overall shipments out of the country. The companies that buy, sell and ship the world’s natural resources have reaped massive profits from the supply disruptions caused by the war, but are having to navigate a growing web of sanctions and other curbs as Western governments wrestle with the challenge of ensuring the flow of vital commodities without benefiting Russia. Russian crops aren’t under any sanctions, but trade can be complicated by restrictions on Russian banks and state companies.
  • Broadcom Inc.’s proposed $61 billion takeover of cloud-computing company VMware Inc. will get an in-depth review from the UK’s antitrust agency after the firm did not offer any remedies to allay the body’s competition concerns. The Competition and Markets Authority set on Wednesday a deadline of Sept. 12 to make its decision over whether to block the deal or wave it through. The agency usually only considers structural remedies, that includes selling parts off, in the first stage of its merger investigations. It was an expected move after the CMA previously found that the deal could possibly increase costs for customers including banks and telecommunication firms, plus dent innovation unless acceptable solutions are forthcoming. Any deal would cause competition issues in the supply of hardware components, the CMA said.
  • UBS Group AG is bringing back Sergio Ermotti as chief executive officer to oversee the historic acquisition of Credit Suisse Group AG, tapping a Swiss insider with extensive restructuring experience to replace Ralph Hamers after just over two years. Ermotti, chairman of Swiss Re, will retake the role he held for nine years after the annual general meeting next week, the bank said on Wednesday. Hamers will stay on at the bank for a transition period, having helped broker the $3.3 billion deal that saw UBS buy its local rival this month amid a collapse in confidence and client outflows. Ermotti, 62, brings to the combined bank his familiarity with UBS and the Swiss financial landscape, qualities seen as critical for an integration that executives are stressing will be complicated and fraught with the potential for losses. The Lugano-born executive previously steered UBS through the aftermath of a rogue trader crisis, slashed much of the fixed-income trading business,  and downsized the investment bank on the way to its current focus on wealth management.
  • US mortgage rates edged down to a six-week low of 6.45%, helping drive a fourth-straight advance in applications to buy a home. The contract rate on a 30-year fixed mortgage eased 3 basis points in the week ended March 24, Mortgage Bankers Association data showed Wednesday. The group’s index of mortgage applications to purchase a home rose 2% to 172.7. Despite the latest decline, mortgage rates are about 2 percentage points higher than they were a year ago after a series of Federal Reserve rate increases. Treasury yields have stabilized over the past couple weeks after sliding in the wake of several bank closures.
  • Global creditors are bracing for a long-drawn battle to recover money from China’s troubled developers, as a property meltdown continues to roil the nation’s $735 billion offshore bond market for a third straight year. Frustrated dollar bondholders have been trying all they can to make defaulters pay, but their efforts have largely been stymied by lengthy debt restructuring processes and litigation. Below their onshore peers in the pecking order, a few have appealed for intervention by regulators. Many have even resorted to winding-up petitions, a risky legal action that could backfire by triggering fire sales at distressed prices. Though a flurry of debt revamp proposals shows incremental progress lately, a plan unveiled last week by China Evergrande Group has raised concerns that investors may have to wait for years to get their money back. Under one of the options, the biggest Chinese builder to default offered to swap old notes with new ones with maturities of as long as 12 years. Nomura Holdings Inc. said in a report that the plan sets a “low bar,” though it may help expedite others in the pipeline.
  • Lululemon (LULU US) shares leap 15% in premarket trading after the athletic-apparel brand reported fourth-quarter adjusted earnings per share that beat analyst estimates and issued guidance that topped expectations. Analysts found the results to be strong overall, with most expecting the negative sentiment around the stock to be alleviated with the performance.