March 7, 2022

Daily Market Commentary

Canadian Headlines

• Fairfax Financial Holdings Ltd., the Canadian investment firm run by Prem Watsa, is exploring the sale of its stake in Indian financial firm IIFL Wealth Management Ltd., according to people familiar with the matter. The Toronto-based firm is in early-stage talks with potential bidders for the stakes, said the people, who asked not to be identified as the information is private. Other major shareholders including General Atlantic could also consider joining Fairfax in selling their own stakes, the people said. IIFL Wealth shares fell 1.2% on Monday, giving the company a market value of around $1.7 billion. A vehicle controlled by Fairfax holds about 13.6% of the firm’s shares, while General Atlantic has a 21% stake, according to data compiled by Bloomberg.
• Choice Properties Real Estate Investment Trust announced today that it has entered into an agreement to sell six high-quality office properties in Toronto, Vancouver, and Montreal to Allied Properties Real Estate Investment Trust for an aggregate purchase price of $794 million, excluding transaction costs. The purchase price will be satisfied through the issuance of approximately 11.8 million exchangeable Class B limited partnership units of Allied Properties Exchangeable Limited Partnership, an affiliated entity of Allied, and a promissory note in the amount of $200 million. The Class B Units were valued at $50.30 per unit and are exchangeable into, and economically equivalent to, publicly traded trust units of Allied.

World Headlines

• The Euro Stoxx 50 Index sank 20% from its November record high as investors shunned equities on the back of surging inflation amid the war in Ukraine. The index was down 1.9% at 8:01 a.m. in London, poised for a technical bear market at the close.  Equities were reeling on Monday as soaring oil after reports that the U.S. was discussing a ban on Russian crude imports sent shock waves across markets. European stocks have been roiled this year as Russia’s invasion of Ukraine added to worries about inflation remaining stubbornly high across the euro zone. The benchmark Stoxx 600 Index is also down 16% from its own January record high as investors brace for more volatility.
• U.S. index futures also fell, with airline stocks down in premarket trading and energy advancing after oil jumped as high as $139 a barrel. Banks led losses in Europe, while defense companies gained on the escalating war in Ukraine. European gas, palladium and copper hit all-time highs. The Biden administration is considering whether to ban the import of Russian oil and energy products, a move that could add to economic pressure as more companies pull out of the country in response to Moscow’s invasion of Ukraine. High energy prices threaten to stall global growth, a risk that is sending tremors across markets.
• Asia’s stock benchmark was on course to enter a technical bear market on growing investor concerns about the economic fallout of the war in Ukraine and sustained regulatory pressure on China’s technology sector. The MSCI Asia Pacific Index tumbled as much as 2.8% on Monday, taking its losses from a record reached in February last year to more than 20%. Hong Kong’s Hang Seng Index slid to its lowest level in almost six years, while a gauge of Chinese shares listed in the city sank to its weakest level since March 2009. Japan’s Nikkei 225 lost nearly 3% to be among the region’s worst performers. Monday’s broad rout was sparked by fears of a global inflation shock as oil prices extended their relentless surge on the prospect of a ban on Russian crude supplies. That’s making some of Asia’s emerging markets such as India, South Korea and Thailand particularly vulnerable given these nations’ dependence on imports to meet their demand. Indian stocks have been among the top losers since Russia invaded Ukraine late last month.
• Oil soared — nearing $140 a barrel earlier — as shock waves rippled through the market after the U.S. said it was considering a ban on Russian crude imports. Brent subsequently eased to about $125, levels that are exacerbating fears of a major inflationary shock to the global economy. The Biden administration is mulling whether to prohibit Russian oil imports without the participation of allies in Europe, at least initially, according to people familiar with the matter. Diesel futures in Europe and the U.S. surged to the highest in decades, while gasoline contracts also leaped. Secretary of State Antony Blinken told NBC over the weekend that the White House is in “very active discussions” with Europe about a ban to tighten the economic squeeze on Russian President Vladimir Putin. The U.S. has so far resisted restrictions on Russian crude imports due to concerns about the impact of rising prices, but most buyers are refusing to take it anyway, resulting in an embargo in all but name.
• Gold surpassed $2,000 an ounce after the U.S. said it may ban Russian oil exports in retaliation for President Vladimir Putin’s invasion of Ukraine, raising concern about higher inflation and slowing economic growth.  Bullion extended its biggest weekly advance since July 2020 after U.S. Secretary of State Antony Blinken said on Sunday that America and its allies are discussing an embargo of Russian oil. That could further reduce expectations for the Federal Reserve to aggressively hike interest rates this year to deal with what is already the highest inflation in 40 years. The metal eased back, after earlier reaching as high as $2,002.59, after a spokesperson for the German government said it was against entering into the next sanctions spiral, possibly signaling disunity when it comes to banning Russian oil. The U.S. is considering whether to act without help from its allies in Europe, according to two people familiar with the matter.
• Wheat prices soared closer to record levels as Russia’s intensifying war in Ukraine cuts off supplies from one of the world’s leading breadbaskets.  Futures in Chicago jumped by the daily limit for the sixth straight session, rising 7% to $12.94 a bushel. That builds on a massive surge of 41% last week, the most in data spanning six decades, and puts prices at their highest since 2008. The Paris contract breached an all-time high after jumping as much as 11%. Wheat is a major food staple and surging prices will pile pressure on government budgets and add to global hunger. Prices have reached levels that were last seen during the 2008 global food-price crisis, surpassing highs that helped contribute to the Arab Spring a decade ago.
• Hong Kong’s Covid-19 death rate is now the highest in the world, after fatalities among the city’s under-vaccinated elderly surged and concerns mount there may be more to come as infections spread through care facilities. The financial hub’s seven-day rolling average rose to 27 deaths per 1 million people as of Sunday, according to Bloomberg calculations based on Johns Hopkins University data. That’s double Latvia, which has the second-highest rate, and far surpasses the peak of the U.S.’s omicron wave. Hong Kong announced 25,150 new cases on Monday, with 75 patients in critical condition in hospitals. Authorities reported 161 fatalities, mostly elderly and unvaccinated, as well as the deaths of two children — an eight-year-old girl and a four-year-old girl — which will be reflected in Tuesday’s tally.
• Nickel surged as much as 40%, in one of the most extreme price moves ever seen on the London Metal Exchange, as fears over Russian supplies leave buyers exposed to a historic squeeze.  The metal used in stainless steel and lithium-ion batteries added more than $10,000 to trade at a 15-year high above $40,000 a ton, in the biggest-ever daily dollar gain in the 35-year history of the contract. Palladium also spiked sharply higher amid rising risks to shipments from one of the world’s top producers of the metal. Nickel’s surge builds on a 19% gain seen last week as banks cut exposure to Russian commodities suppliers and major shippers steered clear of the country’s key ports. Now, as the U.S. weighs a potential ban on Russian oil imports, traders are questioning whether industrial consumers will elect to avoid buying other Russian raw materials, even in the absence of direct prohibitions on purchases.
• Traders piled into options that oil could surge even further after rising to the highest since 2008, with some even placing low-cost bets that futures surpass $200 before the end of March. Prices to buy call options at higher prices surged Monday as the market assessed the possibility of a supply cut-off from Russia, one of the world’s biggest exporters. More than 1,200 contracts for the option to buy May Brent futures at $200 a barrel traded on Monday, according to ICE Futures Europe data. The options expire March 28, three days before the contract settles. The price to buy them jumped 152% to $2.39 a barrel. A $150-a-barrel call option for the June Brent contract doubled from Friday, according to ICE, while the cost of $180 call options jumped 110%. The front-month May contract for Brent surged dramatically early on Monday as traders panicked over talks of a Russian crude ban amid Libyan supply disruptions and delays to expected progress in Iranian nuclear talks.
• As equity markets sink around the world, Morgan Stanley and Citigroup Inc. strategists say a perfect storm looks to be gathering. “Downside risk remains most acute over the next 6-8 weeks,” Morgan Stanley’s Michael Wilson wrote in a note to clients. “We are firmly in the grasp of a bear market that is incomplete in both time and price.” Separately, Citi strategists led by Jamie Fahy said a global gauge tracking analyst estimates on corporate profits has turned negative for the first time since September 2020. This is a potential “game-changer,” eroding their conviction on the prospects of risk assets, they wrote.
• The Biden administration is considering whether to prohibit Russian oil imports into the U.S. without the participation of allies in Europe, at least initially, according to two people familiar with the matter. The administration has yet to decide on a U.S. import ban, with the timing and scope of any move still fluid, according to the people, who spoke on condition of anonymity. Administration officials have been in close contact with allies on a possible ban while also working to prepare for the domestic impact, the people said.
• Netflix, TikTok, Samsung and credit card operators have joined the lengthening list of businesses cutting ties with Russia or reviewing their operations in the country as reputational and financial risks mount. International sanctions, the closure of airspace and transports links due to the war, and the financial restrictions on SWIFT and capital controls have made it difficult if not impossible for many companies to supply parts, make payments and deliver goods to and from Russia. Added to that, the potential international consumer backlash against any company perceived as helping Vladimir Putin’s regime means that the exodus of corporations from Russia has become a stampede.
• Billionaire activist investor Carl Icahn sold his remaining stake Occidental Petroleum Corp. after the company’s shares surged along with oil prices, according to a person familiar with the matter.  Icahn informed Occidental’s board of the sale in a letter Sunday, said the person, asking not to be identified because the information wasn’t public yet. As recently as August, Icahn held a 6.94% stake in the Houston-based oil explorer. Last week he reported in a regulatory filing that his stake had dropped to 3.44%, worth about $1.6 billion.
• Oasis Petroleum Inc. and Whiting Petroleum Corp. agreed to a $6 billion merger of equals that combines two mid-sized oil producers in North Dakota’s Bakken shale patch. The combined company will have about 972,000 net acres across the Willison Basin with production of 167,800 barrels of oil equivalent per day, the companies said in a statement Monday. The deal comes less than two years after both companies filed for bankruptcy in the aftermath of the crash in oil prices caused by the onset of the pandemic. It’s also 10 months since Oasis sought to bulk up in the Bakken by agreeing to buy assets there from Diamondback Energy Inc. for $745 million.
• An investing movement that promotes itself as a protector of people and the planet has somehow found itself providing capital to the autocratic regime behind Europe’s worst military conflict since World War II. Funds labeled ESG — an acronym that denotes a commitment to environmental, social and governance interests — own shares of Russia’s state-backed energy behemoths Gazprom PJSC and Rosneft PJSC, as well as its biggest lender Sberbank PJSC. The funds also hold Russian government bonds, providing money that ultimately helped pad the coffers of President Vladimir Putin’s autocracy.
• Investors added money to exchange-traded funds that buy emerging market stocks and bonds last week. This was the 10th straight week of inflows. Inflows to U.S.-listed emerging market ETFs that invest across developing nations as well as those that target specific countries totaled $1.35 billion in the week ended March 4, compared with gains of $623.5 million in the previous week, according to data compiled by Bloomberg. So far this year, inflows have totalled $10.1 billion.
• Uber Technologies Inc. raised its forecast for earnings in the current quarter, defying concerns of a lasting impact on ride-hailing demand due to omicron. The shares jumped about 4% in early trading. Adjusted earnings before interest, tax, depreciation and amortization are expected to be $130 million to $150 million, the San Francisco-based company said on Monday. That’s higher than the $100 million to $130 million Uber projected when it announced fourth-quarter resultslast month and more than the $120.4 million analysts are projecting, according to data compiled by Bloomberg. “Our mobility business is bouncing back from omicron much faster than we expected,” Chief Executive Officer Dara Khosrowshahi said in a filing with the Securities and Exchange Commission. “Whether for travel, commuting, or going out at night, we’re seeing healthy and growing demand across all use cases, highlighting just how eager consumers are to get moving again.”
• Bed Bath & Beyond Inc. shares rallied in premarket trading Monday after Ryan Cohen’s investment firm RC Ventures disclosed a 9.8% stake in the retailer and asked that it consider a sale of the whole company. The Union, New Jersey-based home goods retailer jumped as much as 55% in early trading after Cohen said Bed Bath & Beyond should consider selling itself to a well-capitalized buyer or sell its baby products business. In a letter sent to the company’s board Sunday, RC Ventures said its executives received “outsized” compensation relative to its performances.
• Fuel prices across the globe are surging, with gasoline in the U.S. leaping toward a record, the latest catalyst to an already-spiraling cost of living. In the U.S., retail gasoline prices are just cents away from a record high set in 2008, according to the American Automobile Association. In Europe it’s a similar situation, with the road fuel at previously unseen levels in the U.K., according to motoring services group RAC, and prices in Germany at the highest since at least 2006, according to European Union data. Russia’s invasion of Ukraine has pushed commodities prices — from energy to grains to metals — higher amid fears of supply disruptions across the globe. On Monday, Brent oil soared past $139 a barrel after reports that the U.S. was discussing an embargo of Russian oil exports, adding to inflationary pressures and further squeezing household budgets.
• Russian oligarchs in line to be sanctioned by the U.K. government could have their assets frozen, even before the measures are formally introduced, under a plan tabled by British lawmakers. The measure, proposed by former minister David Davis, may be voted on Monday in the House of Commons. It reflects concern that Prime Minister Boris Johnson has been too slow to hit oligarchs with wealth in London as a way to pressure Russian President Vladimir Putin to end his invasion of Ukraine. Johnson has also been criticized for giving potential targets too much time to move their assets abroad before any restrictions are imposed. The British government has already been reacting to pressure to tackle Russian money laundering in response to the invasion of Ukraine, and will fast-track legislation Monday that requires foreign owners of U.K. property to register their interests. It has also proposed new powers to more rapidly sanction those who have already been punished by British allies such as the European Union, the U.S. and Canada.
• More than 6 million people worldwide have died from Covid-19 two years after the novel pathogen started spreading globally, despite the distribution of vaccines that slashed fatality rates across the globe. The latest 1 million recorded deaths came more slowly than the previous intervals. It took about 125 days to go from 5 million deaths to 6 million, compared to 117 days to hit the 5-million mark and less than 90 days each to reach the 3- and 4-million ones. The pace has returned to what was seen during the first year of the pandemic, when the virus was still taking hold. Covid continues to kill thousands of people every day. Billions more remain unvaccinated, either because they lack access to the shots or are unwilling to receive them, leaving them exposed to the infection and the world vulnerable to new variants.

*All sources from Bloomberg unless otherwise specified