May 10, 2023

Daily Market Commentary

Canadian Headlines

  • Brookfield Asset Management’s earnings rose in the first quarter as it grinds ahead with raising money for new funds in the face of volatile markets. The Toronto-based alternative investment firm made $516 million, or 32 cents a share, in line with estimates by analysts in a Bloomberg survey. Distributable earnings were $563 million, up 15% from the same period last year. “All our flagship funds are currently in the market fundraising and we have a number of new strategies that are gaining traction,” President Connor Teskey said in a statement Wednesday. The firm has raised $19 billion since the start of the year. Brookfield Asset Management manages money on behalf of pensions, sovereign wealth funds and other parties, as well as some of Brookfield Corp.’s own capital. Last year, the parent separated the asset management arm, setting up a new public company, Brookfield Asset Management Ltd., to hold 25% of the business in pursuit of a higher valuation. Brookfield Corp. owns the other 75%.

World Headlines

  • European stocks edged lower on Wednesday as investors digested another slew of corporate earnings while awaiting key US inflation data. The Stoxx 600 Index was down by about 0.2% as of 10:54 a.m. in London. The technology and energy subindexes outperformed, while personal-care stocks trailed. Among individual stocks, Vestas Wind Systems A/S rose as it showed a surprise profit for the first quarter, an indication of a turnaround for the wind turbine maker after a few tough years. ABN Amro Bank NV gained after the Dutch bank reported higher-than-expected first-quarter profit.
  • Stocks steadied as cautious investors assessed the latest crop of earnings and awaited a US inflation report for insights on the path of Federal Reserve rate hikes. While contracts for the S&P 500 and the Nasdaq 100 were little changed, Airbnb Inc. slid 13% in premarket trading after the vacation home-rental company gave a cautious forecast for revenue in the second quarter. Rivian Automotive Inc. rose as the electric-vehicle maker reported a smaller-than-expected loss and reaffirmed production plans. Wednesday’s US inflation figures were top of mind for investors, with US stocks tipped to rally if the reading is soft enough to lay the ground for a halt to Fed tightening, teams at Goldman Sachs Group Inc. and JPMorgan Chase & Co. said. The report is expected to show headline CPI rose by 5% in April on a year-on-year basis, still well above the 2% level targeted by the Fed.
  • Asian stocks headed for their steepest slide in two weeks amid reluctance to buy shares before the release of closely watched US inflation data, and as losses in state-owned enterprises dragged China’s market lower. The MSCI Asia Pacific Index dropped as much as 0.6%, with technology names TSMC and Samsung Electronics among the heaviest drags on the regional gauge. Most of the benchmark’s sub-indexes declined. Shares in China and Hong Kong fell as a rally in the nation’s state-linked companies lost momentum, with an index of central government-owned firms slipping 1.5% as it extended Tuesday’s drop. Disappointing China trade data and fresh signs of geopolitical tensions continued to weigh on the market.
  • Oil fell ahead of a critical US inflation report that could provide key signals on future energy demand and as investors digested a mixed report on crude supplies. West Texas Intermediate fell below $73 a barrel on Wednesday after jumping 7.5% over the previous three sessions. US consumer price data Wednesday will be closely watched for indications of the Federal Reserve’s likely interest-rate path in the second half as the economy shows signs of a slowdown that could hurt energy use. Crude faces downside risks if inflation comes in higher or lower than expected, said Edward Bell, senior director of market economics at Emirates NBD. Brisk price growth supports the Fed’s tightening policy, bolstering the dollar and hitting oil prices. Too low, and it could be interpreted as an indication of a cooling economy.
  • Gold steadied, with focus turning to upcoming US inflation data that will influence the Federal Reserve as it mulls when to pause its monetary tightening cycle. The metal is up about 0.7% since capping a 1.4% weekly increase on Friday, putting it within reach of a record high. Consumer price index figures due Wednesday are expected to show US headline inflation was 5% in April on a year-on-year basis, a level likely to be still uncomfortably high for the Fed. Spot gold declined 0.1% to $2,031.97 an ounce as of 11:40 a.m. in London. The Bloomberg Dollar Spot Index was little changed. Silver and platinum were steady, while palladium edged higher.
  • President Joe Biden and congressional Republicans made little tangible progress Tuesday toward averting a first-ever US default, but pledged negotiations on spending that would open the door to a possible agreement. Congressional aides and presidential staff will begin budget discussions in the coming hours, ahead of another meeting on Friday with Biden and congressional leaders, including House Speaker Kevin McCarthy.  “Over these last few days and weeks, there’s going to be a lot of posturing, politics and gamesmanship and it’s going to continue for a while,” Biden said after his hour-long meeting Tuesday in the Oval Office with leaders from both parties. But, the president said, he viewed the conversation as “productive.”
  • Mortgage applications for US home purchases rose last week as borrowing costs eased, suggesting housing demand is starting to find its footing. The Mortgage Bankers Association’s index of applications for home purchases rose 4.8% to a one-month high in the week ended May 5. The contract rate on a 30-year fixed mortgage ticked down 2 basis points to 6.48%, data showed Wednesday. The average five-year adjustable rate slid to the lowest level since mid-January. The housing market has shown some signs of stabilizing in recent months with mortgage rates down from their October peak. Still, borrowing costs that are about twice as high as they were at the end of 2021 and limited inventory risk weighing on demand during the busy spring selling season.
  • After three years of largely self-imposed isolation because of Covid‑19, China is finally reopening. But US airlines aren’t lining up to reinstate the once-abundant services between the world’s two largest economies. In pre-pandemic 2019, direct flights between the US and China by carriers from both countries averaged 340 per week. Today there are a maximum of just two dozen weekly. The biggest US airlines—American, Delta and United—will keep flying at reduced pandemic-era levels, though not because they expect weak demand, according to people familiar with the matter, who asked not to be identified speaking about private discussions. Rather, it’s a dispute over Russian airspace restrictions that apply to about three dozen countries, including the US, but not to China. The quiet standoff comes against the backdrop of an overall deterioration in relations between Beijing and Washington, clouding prospects for a quick diplomatic resolution. Meanwhile, Japan’s ANA Holdings Inc., IAG SA’s British Airways and Emirates Airlines are among carriers that have restarted, or announced plans to resume, daily flights to Chinese cities including Beijing, Guangzhou and Shanghai. Korean Air’s China service has reached pre-pandemic levels, growing from 13 weekly flights to 84 in April, with plans to expand to 99 this month, the airline says.
  • Italy has signaled to the US that it intends to pull out of a controversial investment pact with China before the end of the year. Italian Prime Minister Giorgia Meloni reassured US House Speaker Kevin McCarthy during a meeting in Rome last week that while a final decision hasn’t been taken, her government is favoring an exit from its role in China’s massive Belt and Road Initiative, according to people present at the talks. Italy signed onto the infrastructure initiative in 2019 when Giuseppe Conte was premier, becoming the only Group of Seven country to become part of the deal. Participation will automatically renew in 2024 unless Rome actively exits the agreement.
  • Nissan Motor Co. is in discussions with the UK government about making additional investments in its plant in Sunderland in a rare potentially positive development for automaking in the country. The plant has “a lot of good potential,”  Chief Executive Officer Makoto Uchida said during a virtual keynote at the FT Future of the Car Summit on Wednesday. Sunderland, the UK’s biggest auto factory which makes the Nissan Qashqai and Juke crossovers, is a key site for Nissan and it’s “in a good position for the future.”  The UK has been struggling to attract investment from the auto industry in the aftermath of Brexit. Efforts to establish a battery supply-chain have largely foundered with local hopeful Britishvolt Ltd. entering administration. Nissan has remained a bright spot with a commitment in 2021 to invest £1 billion to create a UK EV hub.
  • UK Business Secretary Kemi Badenoch is looking to save British businesses £1 billion ($1.3 billion) a year by making changes to the European Union working time directive, British newspapers reported. The government is considering scrapping a requirement placed on firms to keep records of how many hours each staff member works, according to the Sun and the Telegraph. Under the legislation inherited from the UK’s EU membership, this must not exceed an average of 48 hours a week unless they have opted out of the rules. The government has repeatedly said it wants to take advantage of Brexit to make reform rules that it says hamper businesses and dampen productivity. Prime Minister Rishi Sunak originally planned to scrap some 4,000 pieces of inherited legislation by year end, but Badenoch last month told a private meeting of Euroskeptic Conservative Members of Parliament that the deadline was too tight and that the government would instead focus on removing about 800 laws.
  • Cisco Systems Inc. will start manufacturing telecommunications equipment in India as it looks to diversify its supply chain and use the South Asian nation as an export hub. Cisco will begin by making high-end routers and switches for domestic consumption as well as exports, Chief Executive Officer Chuck Robbins said at a news conference in New Delhi Wednesday. Products will start to roll out in the next 12 months, the company’s India President Daisy Chittilapilly said at the same event. San Jose, California-headquartered Cisco, which supplies telecom products to Indian enterprises including mobile carriers such as Bharti Airtel Ltd., will set up its new factory in the southern state of Tamil Nadu. The company plans to hire about 1,200 people for the factory initially but declined to share its size or the investment involved.
  • A consortium backed by Elliott Investment Management agreed to buy drug-research services company Syneos Health Inc. for about $4.4 billion. The investor group also includes former KKR & Co. dealmaker Jim Momtazee’s Patient Square Capital and buyout firm Veritas Capital, according to a statement Wednesday, which confirmed an earlier Bloomberg News report. They will acquire the North Carolina-based firm for $43 per share in cash, a 24% premium to its last close before news of a potential sale emerged in February. The deal, which values Syneos at $7.1 billion including debt, adds to a wave of transactions involving companies that support drug development. Investors favor the sector as a way to gain exposure to pharmaceutical spending without the risk of investing directly in biotech companies whose success or failure rides on the therapies they’re testing.
  • Some of Wall Street’s most experienced traders warned of “unthinkable” long-term implications from a US default and argued the debt limit may need to be permanently repealed. In a letter to Treasury Secretary Janet Yellen, current and former leaders of the Treasury Borrowing Advisory Committee said the costs of the current standoff extend beyond markets to the time that financial firms are having to spend preparing for a possible default. “The short-term impacts of a protracted negotiation are costly; the long-term implications of a default are unthinkable,” wrote the 17-member group, which includes Goldman Sachs Group Inc. executives Beth Hammack and Ashok Varadhan and former JPMorgan Chase & Co. Chief Operating Officer Matt Zames. “The magnitude of adverse consequences from a prolonged negotiation, or a default, is unquantifiable.”
  • BlackRock Inc. is seeking to raise an initial $1 billion for a new Middle East infrastructure and private equity-focused fund with some of the region’s largest sovereign wealth funds, people familiar with the matter said. Saudi Arabia’s Public Investment Fund and the kingdom’s state-backed Hassana Investment Co. are in talks to contribute money, the people said. Abu Dhabi wealth fund Mubadala Investment Co. and other international investors are also considering backing the new vehicle, according to the people, who asked not to be identified as the matter is private. While the first close of the fund may raise about $1 billion, the pool of capital could eventually increase to several billion dollars, according to the people. BlackRock is considering domiciling the fund in Abu Dhabi Global Market, the emirate’s international financial free zone, with operations run out of Riyadh, the people said.
  • European investors have urged Toyota Motor Corp. to improve disclosure of its lobbying on climate change ahead of an annual shareholder meeting in June. A resolution was submitted by three funds that together hold $400 million in Toyota shares — Danish pension fund AkademikerPension, Norwegian financial services company Storebrand Asset Management AS and Dutch group APG Asset Management NV — on Wednesday before Toyota announced earnings in Tokyo. Toyota’s board opposed it, citing past and ongoing efforts to make such disclosures since 2021 and reduce harmful emissions as part of its goal to expand electric vehicle production and become carbon neutral by 2050.