March 8, 2022

Daily Market Commentary

Canadian Headlines

  • Canadian equities edged lower, weighed down by information technology and consumer discretionary stocks, as global markets slumped amid Russia’s war in Ukraine. The S&P/TSX Composite fell 0.5% at 21,304.40 in Toronto. The move follows the previous session’s increase of 0.7%.
  • Intertape Polymer Group agreed to be acquired by Clearlake Capital Group. Clearlake will acquire the outstanding shares of IPG for C$40.50 per share in an all-cash transaction valued at approximately $2.6 billion, including net debt. Deal has an equity value of about C$2.4 billion, according to Bloomberg calculations.

World Headlines

  • European equities rose in volatile trading as investors weighed bets of more stimulus against the impact of surging inflation on economic growth. The Stoxx Europe 600 Index was up 0.3% at 11 a.m. in London after earlier jumping as much as 1.7%. Gains were spurred by a report that the European Union will unveil a plan to jointly issue bonds on a potentially massive scale to finance energy and defense spending as the bloc copes with the fallout from Russia’s invasion of Ukraine. Banks and insurance stocks led gains, while media and personal care stocks declined. Germany’s DAX and the Euro Stoxx 50 Indexes also rebounded after both entered technical bear markets on Monday.
  • U.S. futures rallied along with stocks in Europe on Tuesday after Bloomberg reported that the European Union is considering joint bond sales to help counter the fiscal fallout from Russia’s invasion of Ukraine. Bonds dropped and the euro strengthened. Futures on the S&P 500 and Nasdaq 100 reversed declines to trade higher, signaling a firmer U.S. open after Monday’s rout. The Stoxx Europe 600 index rallied more than 1% before trimming the advance, as the possibility of further central-bank stimulus lifted sentiment. Some of the most-battered sectors, including banks, utilities and carmakers, outperformed. The 10-year Treasury yield jumped seven basis points and yields on core European bonds also rose. The spread between 10-year Italian and German yields — a key gauge of risk in the euro region — tightened.
  • Asia’s stock benchmark extended declines in a bear market amid growing anxiety over how the sanctions on Russia will impact the global energy market and economy. The MSCI Asia Pacific Index fell as much as 1.8% on Tuesday, having lost 3.1% the previous day in its biggest drop in about a year. The slump has left the measure down by almost 23% from a February 2021 peak. Materials firms were among the biggest drags amid volatile price swings in base metals, while financial companies also weighed. The Asian benchmark is poised for a third day of declines amid investor angst over the fallout from the war in Ukraine and sustained regulatory pressure on China’s technology sector. Benchmarks in China, Taiwan and the Philippines were the day’s worst performers.
  • Brent oil pushed higher as European oil giant Shell Plc announced it will stop buying Russian crude and the International Energy Agency said it was disappointed in the actions producers have taken in the market so far. Futures in London rose near $127 a barrel, while West Texas Intermediate also gained after settling at the highest level since 2008 on Monday. The surge in oil has helped push retail fuel prices higher with gasoline at a record in the U.S., according to the American Automobile Association, underscoring the inflationary impact of higher energy costs.  Shell said it will stop buying Russian crude on the spot market and will not renew its term contracts, unless directed by governments to do otherwise. It also said it will change its crude oil supply chain to remove Russian volumes, though this could take some weeks, and will lead to reduced throughput at some of its refineries.
  • Gold climbed to a 19-month high above $2,000 an ounce amid mounting concerns over inflation and growth after Russia’s invasion of Ukraine. Bullion has jumped almost $100 an ounce this month as the threat of a global price shock fuels demand for the haven asset as a hedge against stagflation, where accelerating inflation combines with stagnating economic output. Concern about supply disruptions following sanctions against Russia have sent the price of commodities such as oil, wheat and nickel soaring.
  • Iron ore futures in Singapore held near the highest since August, or around $165 a ton, as investors weighed a likely drop in China’s steel output last month against potential policy support for the economy. Prices have about doubled since mid-November on expectations of economic stimulus, and more recently on the back of investors piling into commodities to hedge against rising global inflation after Russia’s invasion of Ukraine.
  • Wheat futures reached unprecedented highs on Tuesday, highlighting the severe fallout for global food supplies from Russia’s invasion of Ukraine. Most-active futures in Chicago leaped to $13.635 a bushel at the start of the trading session, representing a stunning 77% gain in the staple grain’s price this year. The world is facing a huge supply shock as the war cuts off shipments from a region that accounts for a quarter of global grains trade and the bulk of sunflower oil.  Wheat has since retreated from its peak, but remains at lofty heights. The last time the grain was near these levels came during a 2008 food crisis that sparked political unrest worldwide. Rapeseed and canola futures also reached fresh records, and corn has risen by a quarter this year.
  • Hong Kong’s plan to test the whole city three times in March is now in flux as pressure grows on the government to focus resources instead on addressing a Covid death rate that has surged to the highest in the world. A Ming Pao report said Hong Kong is considering prioritizing reducing Covid-19 deaths over the compulsory citywide test. A later report by the South China Morning Post said the city could postpone testing to April. A health official said at a regular briefing Tuesday that details are still under discussion. On Tuesday, the city announced 28,475 new Covid cases that were positive in a PCR test. Separately, health officials said a new website allowing residents to self-report positive rapid-antigen tests received more than 17,000 submissions, with about 14,700 considered valid — though the number covers results across March 6 and March 7 and weren’t included in the daily total.
  • U.S. drivers are now paying more for gasoline than at any other time in history as demand surges and the war in Ukraine threatens global oil supplies. Average pump prices in the U.S. are now $4.173 per gallon, the highest level in records going back to 2000, according to auto club AAA. Government data going back to 1990 show prices have never been higher than they are now. In California, the most expensive U.S. state for drivers, prices have surged to $5.444 a gallon. Record pump prices pose a major challenge for U.S. President Joe Biden, whose attempts to cap gasoline costs and rein in inflation have so far had little impact. That means American households — already slammed by soaring food costs and electricity prices — are getting hit on all sides.
  • The London Metal Exchange suspended trading in its nickel market after an unprecedented price spike left brokers struggling to pay margin calls against unprofitable short positions, in a massive squeeze that has embroiled the largest nickel producer as well as a major Chinese bank. Nickel, used in stainless steel and electric-vehicle batteries, surged as much as 250% in two days to trade briefly above $100,000 a ton early Tuesday. The frenzied move — the largest-ever on the LME — came as investors and industrial users who had sold the metal scrambled to buy the contracts back after prices initially rallied on concerns about supplies from Russia. The debacle will raise memories of the LME’s darkest period, the “Tin Crisis” of 1985, which saw the exchange suspend tin trading for four years and pushed many brokers out of business. That was driven by the collapse of the International Tin Council, a body backed by 22 governments that collapsed when it could no longer keep propping up prices.
  • China is considering buying or increasing stakes in Russian energy and commodities companies, such as gas giant Gazprom PJSC and aluminum producer United Co. Rusal International PJSC, according to people familiar with the matter. Beijing is in talks with its state-owned firms, including China National Petroleum Corp., China Petrochemical Corp., Aluminum Corp. of China and China Minmetals Corp., on any opportunities for potential investments in Russian companies or assets, the people said. Any deal would be to bolster China’s imports as it intensifies its focus on energy and food security — not as a show of support for Russia’s invasion in Ukraine — the people said. The discussions are at an early stage and won’t necessarily lead to a deal, the people said, requesting anonymity as the discussions aren’t public. Some talks between Chinese and Russian energy companies have started to take place, according to separate sources.
  • Shell Plc will phase out all purchases of Russian oil and gas, with an immediate halt to crude deals on the short-term market, making a dramatic U-turn in response to international opprobrium over its dealings with the country. “We are acutely aware that our decision last week to purchase a cargo of Russian crude oil” was wrong, the company said in a statement on Tuesday. “Our actions to date have been guided by continuous discussions with governments about the need to disentangle society from Russian energy flows.” Shell said it will do this as fast as possible, but it could take weeks to wean itself off Russian crude and result in lower output of fuels at some of its refineries. That comes as diesel markets are already in crisis mode as traders tried to make sense of the magnitude of supply shortfalls due to the Russia crisis.
  • The Great Resignation is turning into a great myth for one Wall Street bank. Morgan Stanley chief James Gorman says the firm has seen relatively few departures in the wake of the pandemic, and certainly nothing like the trend that’s seen U.S. workers quitting their jobs in record numbers. In contrast, he says the bank received about 500,000 job applications last year. Together with a tightening economy that will make job-hopping even harder, that’s further emboldened him to champion a return to regular office life.
  • The European Union will unveil a plan as soon as this week to jointly issue bonds on a potentially massive scale to finance energy and defense spending as the bloc copes with the fallout from Russia’s invasion of Ukraine. The proposal may be presented after the EU’s leaders hold an emergency summit in Versailles, France, that starts Thursday, according to officials familiar with the preparations. Officials are still working out the details on how the debt sales would work and how much money they intend to raise. The spread between 10-year Italian and German yields — a key gauge of risk in the region — tightened 10 basis points to 151 basis points following the news, as the yields on EU bonds rose on the prospect of increased supply. The euro extended gains, rising 0.6% to $1.0920.
  • A Chinese tycoon who built a massive short position in nickel futures is facing billions of dollars in mark-to-market losses after the metal surged more than 170% in two days, according to people familiar with the matter. Xiang Guangda — who controls the world’s largest nickel producer, Tsingshan Holding Group Co., and is known as “Big Shot” in Chinese commodity circles — has closed out part of his company’s short position and is considering whether to exit the wager altogether, the people said. Nickel rocketed to a record high above $100,000 a ton on Tuesday, driven in part by Tsingshan and its brokers’ activity, before trading was suspended. While the exact scale of Xiang’s losses is unclear, Tsingshan’s short position on the LME is in the region of 100,000 tons of nickel, people familiar with the matter said. It could be even larger than that when positions taken through intermediaries are taken into account, people separately said. That means it would have suffered well over $2 billion of daily losses at the most extreme point of nickel’s surge on Monday.
  • Google agreed to acquire cybersecurity company Mandiant Inc.for $5.4 billion, its second-biggest deal ever. With Mandiant, Alphabet Inc.’s Google gets more tools to protect its cloud clients by responding quickly to online threats. The company is working to recruit and support cloud customers amid stiff competition from Microsoft Corp.and Inc. Google will purchase Mandiant for $23 a share in an all-cash deal, according to a statement on Tuesday. Following the close of the deal, Mandiant will be part of Google’s cloud business. Microsoft was also interested in Mandiant, but pulled out of talks more than a week ago, said two people with knowledge of the deliberations who asked not to be identified because the situation is private. Microsoft ended its takeover discussions on concerns that Mandiant’s collection of security businesses wasn’t a good enough strategic fit, according to one of the people.
  • As the Nasdaq 100 Index once again threatens to fall into a bear market, Apple Inc. is living up to its reputation as a relative haven in a turbulent time for tech. While the shares have declined in 2022, the iPhone maker is the best performer among mega-cap companies, with a 10% drop versus an 18% retreat for the Nasdaq 100 Index. Investors have gravitated toward Apple as they seek out high-quality investments in an environment marked by high inflation and growing concern that Russia’s invasion of Ukraine will trigger a recession.  With analysts skeptical about a near-term turnaround for the stock market, Apple has plenty of appeal. The company doesn’t have the kind of nosebleed valuation seen elsewhere in the sector and it reported strong quarterly results in January. Bulls may find further reasons for optimism Tuesday when the company hosts a product event where it’s expected to unveil new versions of its iPhone, iPad and Mac lines.
  • Visa Inc. and Mastercard Inc. are preparing to increase the fees that many large merchants pay when they accept consumers’ credit cards. The fee increases — delayed during the past two years because of the pandemic — are scheduled to kick in next month, according to people familiar with the matter and a document viewed by The Wall Street Journal. Interchange fees account for most of the increase. Merchants pay these fees, which are set by the card networks, when shoppers use their cards. The fees go to the bank that issued the card.
  • AT&T and Discovery could bring a massive bond sale of around $30 billion as soon as Wednesday to fund their media business combination, as U.S. investment-grade issuers continue to move forward with debt sales despite volatile conditions. Credit risk is easing Tuesday morning in New York.
  • A bipartisan group of U.S. senators has introduced a bill to impose secondary sanctions to anyone buying or selling Russian gold in an effort to block one of Moscow’s remaining possible avenues for offsetting the collapse of its currency. Angus King of Maine — along with Republicans John Cornyn of Texas and Bill Hagerty of Tennessee and New Hampshire Democrat Maggie Hassan — launched the legislation to stop anyone transacting with or transporting gold from Russia’s central bank holdings or selling gold physically or electronically in Russia. Russia’s gold stockpile was valued at $132.3 billion as of the end January. The move may deter banks in countries such as China and India from buying or lending against Russia’s sovereign gold stockpile, which is the fifth-biggest in the world. Western lenders are already barred from transacting with the central bank, effectively cutting its gold out of the biggest markets in New York and London.
  • European gas prices swung wildly after Russia threatened to cut supplies to Europe in retaliation for sanctions, and as the European Union scrambles to find alternatives. Deputy Prime Minister Alexander Novak warned late Monday that Russia could halt flows along the existing Nord Stream 1 pipeline to Germany. The EU is trying to get ahead of any such moves, mapping out a plan to cut its huge dependency on Russian gas. Benchmark Dutch gas futures slumped to a loss of 12% on Tuesday, after surging more than 30% earlier. A forecast of milder weather next week may help reduce demand in the final weeks of winter.

“The journey of a thousand miles begins with one step.” – Lao Tzu

*All sources from Bloomberg unless otherwise specified