March 9, 2023

Daily Market Commentary

Canadian Headlines

  • Lithium Royalty Corp. raised C$150 million ($109 million) in Canada’s biggest initial public offering in 10 months, tapping investor appetite for a slice of the booming battery metals industry. The Toronto-based company sold 8.82 million shares for C$17 apiece in its IPO, within its targeted range of C$16 to C$19. This would be the biggest IPO on a Canadian exchange since last May, when Bausch + Lomb Corp. was spun off in a dual listing and Dream Residential Real Estate Investment Trust went public.  The sale, which confirms an earlier report by Bloomberg, brings another lithium-based company to the Toronto Stock Exchange when the appetite for battery metals is soaring on strong prospects for electric vehicles. The company, which was founded by Waratah Capital Advisors Ltd. in 2018, will trade under the stock symbol LIRC.
  • Supermarket billionaire Galen Weston and top executives of other Canadian grocery chains pushed back against accusations from lawmakers that they’re gouging customers on food prices. The executives told a parliamentary committee on Wednesday that food price inflation is affecting every country right now, and argued Canada is doing better on this measure than many others.  Weston’s grocery chain, Loblaw Cos., earned C$2.66 billion ($1.93 billion) before taxes last year, at a pre-tax margin of 4.7%. That was up slightly from 4.6% a year earlier. Weston told the lawmakers that underlying food prices have been increasing 25 times faster than his company’s profits.

World Headlines

  • European equities fell as traders took profit on risk assets amid concerns about hawkish monetary policy, while digesting another busy day of corporate earnings. The Stoxx Europe 600 declined 0.5% by 9:26 a.m. in London. The mining and real estate sectors led the retreat, while insurance stocks outperformed. Hawkish commentary from Fed Chair Jerome Powell has shaken markets this week as traders fret over the path of monetary policy. While rate expectations have moved higher in the US, they are rather muted in Europe. The Fed may have set the tone, but in Europe, stocks continue to benefit from a yield cushion, helping them hold on to their 2023 gains. This year’s rally has been driven by optimism from China’s reopening, a milder winter and hopes for a resilient economy.
  • US equity futures slipped and benchmark Treasury yields held close to the 4% mark on Thursday, as investors priced the likelihood of higher interest rates and a looming US recession. Futures on the S&P 500 slipped 0.2% and those on the rate-sensitive Nasdaq slid 0.5%. In New York pre-market trading, chipmakers Nvidia Corp and Advanced Micro Devices Inc fell about 1%, while Tesla shed almost 3% after US regulators launched a probe over complaints about the steering wheel in some new models. Investors are digesting Jerome Powell’s signaling after the Federal Reserve chief told lawmakers no decision had been made on the pace of the next move. He reiterated however, that an acceleration in tightening was still on the table, and rates may go higher than anticipated should economic data warrant. The comments coincided with another round of US jobs figures that came in on the hot side, bolstering bets that policymakers will remain hawkish. Wagers now solidly tilt toward a half-point move in March, rather than the quarter-point earlier expected.
  • Asian stocks were mixed as the latest Chinese inflation data underscored a mediocre recovery in the economy, offsetting the boost from a softer tone by the Federal Reserve’s chief on interest rate increases. The MSCI Asia Pacific Index rose as much as 0.3% on Thursday before giving up the increase. About three stocks declined for every two that advanced in the gauge. Japan led gains in the region ahead of the Bank of Japan meeting this week, where expectations are for ultra-easy policies to continue. Chinese stocks fell after the nation’s costs of food and consumer goods eased following the end of the Lunar New Year holiday, suggesting that an economic rebound driven by reopening may take longer than expected. South Korean shares also declined.
  • Oil held losses as a persistently hawkish tone from the Federal Reserve countered the first decline in US crude inventories this year. West Texas Intermediate traded below $77 a barrel after sliding almost 5% over the previous two sessions. Fed Chair Jerome Powell reiterated that the bank may take interest rates higher than anticipated, but said a decision hadn’t been made about the March meeting. The remarks made during congressional testimony offset news of a surprise drop in US crude stockpiles, with inventories falling by 1.69 million barrels last week, according to Energy Information Administration data on Wednesday. Oil has been largely rangebound this year as concerns over more US rate hikes compete with optimism around China’s recovery after the dismantling of Covid Zero. Most market watchers are still bullish about the price outlook, with top trader Trafigura Group expecting Brent to hit $90 a barrel by midyear as Asia’s biggest economy rebounds and Russian supply fades.
  • Gold held near its lowest this year, as speculation grows that the Federal Reserve will opt for a larger interest-rate hike this month following comments from Chair Jerome Powell. The metal’s recent recovery was crushed this week after Powell said in testimony in Washington the central bank was prepared to raise the pace of hikes should employment or inflation data come in hot. Traders increased bets the Fed will implement a 50 basis-point rise later this month following the comments, causing bullion to plunge. Bullion has seen its gains earlier this year wiped out after strong inflation and jobs data raised expectations of more aggressive action by the Fed. The tight labor market has been a major target of the central bank’s tightening campaign, due to its role in driving wage increases that feed price pressures. Spot gold added 0.2% to $1,817.48 an ounce at 8:53 a.m. in London, and is down 2.1% so far this week. The Bloomberg Dollar Spot Index weakened slightly. Silver and platinum edged higher, while palladium declined.
  • Mexico’s inflation decelerated more than expected in February, suggesting that the central bank may have some room for policy maneuver at this month’s interest rate setting meeting.  Consumer prices quickened 7.62% in February in comparison to a year earlier, down from 7.91% in January, the national statistics institute reported Thursday. The reading was lower than the 7.68% median estimate of economists surveyed by Bloomberg. Core inflation, which excludes volatile items such as fuel, decelerated to 8.29%, below the 8.45% reading in January and the 8.35% median estimate. The measure, which is closely watched in Mexico, had slowed in December for the first time in two years.
  • The stock ETF boom has been blamed for seemingly every Wall Street ill, from blindly ramping up share prices and fueling volatility to undermining governance across corporate America. Now new academic research claims that equity exchange-traded funds are even creating distortions in the world’s largest debt market. By gradually funneling their dividend income into money-market funds — which typically hold short-term Treasuries — equity ETFs are then seen adding upward pressure to US yields when they divest these holdings in one swoop to make their own distributions to shareholders. The paper penned by a trio of academics suggests that a slew of stock products are indirectly hitting prices in the short-term Treasury market, thanks to their big liquidations in the world of mutual funds.
  • The British government is in talks with the United States and European Union to prevent potential trade barriers from harming its position in the green-energy race. The UK — one of the world’s largest markets for offshore wind — is working “closely” with the US to make sure elements of the Inflation Reduction Act don’t hurt British supply chains, among other issues, Minister for Energy Security and Net Zero Graham Stuart said in an interview with Bloomberg Television in Houston. Stuart’s remarks come as the UK’s shift to cleaner energy has faced strong criticism by the government’s independent climate watchdog, which on Thursday said ministers lacked the “urgency” of foreign counterparts. Energy firms have been drawn in particular by President Joe Biden’s IRA, which is luring investors with generous tax credits to accelerate the country’s renewable-energy development.
  • President Joe Biden is proposing a series of new tax increases on billionaires, rich investors and corporations in his latest proposal for how Congress should prioritize taxes and spending. Biden’s budget request to Congress, which is slated to be released Thursday, calls for a 25% minimum tax on billionaires, according to a White House official familiar with the proposal who declined to be named because the plan is not yet public. The plan would also nearly double the capital gains tax rate for investment to 39.6% from 20% and raise income levies on corporations and wealthy Americans. The proposal, which is largely a reprise of Biden’s multi-trillion dollar Build Back Better economic package, has little chance of passing Congress, particularly now that Republicans control the House of Representatives. Biden was unable to pass similar tax increases when Democrats enjoyed control of both chambers of Congress, instead settling for slimmed down legislation focusing on energy and health policy known as the Inflation Reduction Act.
  • Russia launched a devastating bombardment against cities across Ukraine, killing at least five people and casting hundreds of thousands more into sporadic blackouts with a new mix of weapons that mostly evaded air defenses. The barrage extended Russian President Vladimir Putin’s five-month campaign of air strikes targeting civilian infrastructure including the energy grid, hospitals, schools and residential buildings. At the same time, Kremlin forces are storming Ukrainian fortifications in the city of Bakhmut, prompting President Volodymyr Zelenskiy to call for reinforcements to prevent Russia from gaining an “open road” to capture more territory in Ukraine’s eastern Donbas region.
  • North Korea fired a suspected short-range ballistic missile after the influential sister of the state’s leader threatened the US with severe consequences if it goes ahead with joint military drills with South Korea. South Korea’s Joint Chiefs of Staff said in a text message to reporters the missile was fired at around 6:20 p.m. Thursday from the western port city of Nampho toward the Yellow Sea. The launch adds to a barrage of rockets Pyongyang has shot off in recent weeks, including an intercontinental ballistic missile designed to deliver a nuclear warhead to the US mainland. Further details on the launch weren’t immediately available. The missile went on a rare path toward waters between the Korean Peninsula and China. Almost all of North Korea’s missiles are fired toward waters off its east coast.
  • Credit Suisse Group AG shares dropped close to a record low after the Swiss bank said it was delaying publication of its annual report following a last-minute query by US regulators over previous financial statements. The shares fell as much as 6.4% to 2.504 Swiss francs ($2.672) in Zurich, with the bank’s market capitalization edging close to the $10 billion mark. Credit Suisse has lost about 9% of its value so far this year. The Zurich-based lender was due to publish the reports on Thursday morning but received a late call from the Securities and Exchange Commission on Wednesday evening. Officials there were querying revisions Credit Suisse made to cash-flow statements related to the financial years 2019 and 2020, as well as related controls, the bank said.
  • US buyback announcements are running at a record pace this year, though more than two-thirds of the $261 billion in commitments are spread across only five companies, according to JPMorgan Chase & Co. strategists. Chevron Corp.’s $75 billion leads the way, followed by Meta Platforms Inc. with $40 billion, Goldman Sachs Group Inc. with $30 billion, and Booking Holdings Inc. and Salesforce Inc. with $20 billion each, a team led by Dubravko Lakos-Bujas wrote in a note. While announcements of buybacks are scaling new peaks so far this year, execution of them has been falling. According to the strategists, stock repurchases were down 20% in the fourth quarter, with the pace decelerating since the first quarter of last year.
  • General Electric Co. expects profit margins at its aviation division to continue to expand over the long term as an independent business, the company said Thursday.  GE Aerospace, which today primarily makes and services jet engines, should also see revenue growth at a mid- to high-single-digit rate and generate free cash flow “in line with net income” over the same period, Chief Executive Officer Larry Culp said in a statement. The long-term targets reflect the company’s latest expectations beyond 2023 following Culp’s multi-year push to turn around GE’s manufacturing divisions. Profit margins at GE Aerospace unit in particular have garnered attention as the company boosts jet engine deliveries to Boeing and Airbus. New turbines are loss-making early in their life before generating profits for several years through services.
  • Informa Plc agreed to buy Tarsus in a deal valued at $940 million including debt, betting on a rebound in the events industry. The acquisition will be funded with cash and about 26 million new Informa shares, valued at $210 million, the London-based information and exhibitions company said alongside full-year results on Thursday. Tarsus is being sold by private equity firm Charterhouse Capital Partners. The company is also eligible for an additional $45 million payment, made in Informa shares, if Informa’s stock price reaches 850 pence within the two-year period after the deal closes. The deal is expected to close by July, the company said.
  • Inc. posted a 7% rise in quarterly revenue after Chinese online consumer spending held up during an economic downturn. China’s second-largest online retailer reported revenue of 295.4 billion yuan ($42.4 billion) for October to December, in line with the 295.5 billion yuan average of analysts’ projections. Net income was 3 billion yuan, versus a 2.9 billion yuan estimate. JD and larger rival Alibaba Group Holding Ltd. have grappled with weak consumption sentiment since the world’s No. 2 economy buckled under the weight of China’s rigid Covid control measures. The bigger company reported a mere 2.1% rise in quarterly revenue in 2022’s final three months, underscoring the economic uncertainty that’s prevailed even after China abolished Covid restrictions in December.
  • BlackRock Inc. is starting two private equity funds targeting wealthy individuals in Europe, as the world’s largest asset manager seeks to tap rising appetite for alternatives among the rich. The New York-based group expects to raise about €1 billion ($1.1 billion) or more for the new European Long-Term Investment Funds, Edwin N. Conway, global head of BlackRock Alternatives, said in interview. BlackRock previously raised about €1 billion for two similar funds.  While rich individuals in Europe allocate less than 2% of their portfolios to alternative assets, that could rise to about 20% over time as demand for exposure to asset classes such as private equity, infrastructure and private credit increases, Conway said.
  • This year was supposed to herald air travel’s big comeback, with China reopening, airlines ramping up flight schedules and airports going on a hiring spree to handle the surge. But a potential bottleneck to that growth is looming in form of a shortage of aircraft engines and spare parts, particularly on workhorse Airbus SE and Boeing Co. jets. The shortfall is being exacerbated by the fact that more carriers are flying with the latest-generation turbines that — while as much as 20% more fuel efficient — also have been prone to far more frequent maintenance cycles than their more robust predecessors. As a result, airlines around the world have been forced to ground hundreds of airplanes just as they gear up for what stands to be a busy summer travel season. Air Baltic Corp AS says 10 of its 39 Airbus A220s are currently out of service due to engine issues. In the US, budget carrier Spirit Airlines Inc. warned it would scale back growth plans due in part to a spate of malfunctioning engines. And India’s IndiGo is seeking compensation for about 30 planes it has had to ground due to parts shortages, some of which are tied to engines