May 11, 2022
Daily Market Commentary
- Canadian stocks dropped for a fourth straight day, closing on the brink of the first correction since 2020, as investors exit risk assets on concerns about rate hikes and slowing economic growth. The S&P/TSX Composite Index closed 0.6% lower on Tuesday after Federal Reserve Bank of Cleveland President Loretta Mester said 75 basis-point rate hikes from the Fed cannot be ruled out if inflation doesn’t come under control. The Canadian equity benchmark has dropped 9.95% from its record closing price reached on March 29. (A 10% decline is considered a correction.) Commodity producers, financial stocks and tech were among the biggest drags on the index Tuesday. Suncor Energy Inc. declined 1.3%, while Shopify Inc. fell 1.7%. Bausch Health Cos. also weighed on the TSX, sinking 27% after the company reported earnings that largely missed analysts’ expectations.
- European stocks rose as Covid cases in China eased, while investor attention turned to US inflation data for clues on the path of monetary policy. The Stoxx Europe 600 Index was up 1.1% by 9:46 a.m. in London, extending a rebound from a four-week long slump that was sparked by concerns over tightening central bank policies, surging commodity prices and fears of a recession. Consumer products and mining stocks led the gains, while health care stocks underperformed as Roche Holding AG slumped as its cancer medicine billed as a potential blockbuster failed in a study on patients with the most common form of lung cancer. Bayer AG also fell after the Biden administration recommended the US Supreme Court reject a California Roundup appeal.
- US index futures and European stocks advanced as investors awaited a key inflation report to assess whether the Federal Reserve’s efforts to tame inflation in the world’s largest economy are working. Contracts on the S&P 500 and Nasdaq 100 indexes rose at least 0.9% each, while Europe’s Stoxx 600 climbed for a second day. The dollar fell and Treasury yields slumped. US-listed Chinese stocks rallied in New York premarket trading after the Asian nation reported easing Covid cases. Despite the gains, sentiment remains fragile as investors seek evidence that price pressures are peaking in the global economy. US data later Wednesday may show inflation moderated in April but stayed above 8%. Traders will use this information to weigh whether the Fed can continue with its half-point hikes as expected or will need to opt for a three-quarter-point increase.
- Asian equities advanced, halting a seven-day slide, as new Covid cases decreased in Shanghai and global appetite for risk improved. The MSCI Asia Pacific Index was higher by as much as 0.5% as tech giants Tencent and Meituan climbed alongside communication-services shares. China’s CSI 300 Index led gains in the region after Shanghai reported fewer daily infections Tuesday and zero cases were found in the community. Asia’s benchmark is set to end its longest losing streak since March 2020, with about $2 trillion in value wiped out since a January peak amid concerns over China’s Covid-Zero stance, inflation and US interest rates.
- Oil jumped near $103 a barrel as virus cases eased in China ahead of US inflation data that may influence the pace of interest-rate hikes. West Texas Intermediate futures rebounded after plunging around 9% over two days. Infections in Shanghai and Beijing dropped on Tuesday, providing some cautious optimism of improvement after lockdowns led to surging inflation in April. The US consumer-price index print is scheduled for later Wednesday. The oil market has been whipsawed over the last couple of months by Covid-19 restrictions across China and Russia’s invasion of Ukraine. The war has fanned inflation, driving up the cost of everything from food to fuels, with retail gasoline in the US hitting a fresh record ahead of the summer driving season.
- It could be a significant and painful day for gold, with the precious metal at risk of losing all YTD gains. Ahead of US CPI, the question of whether the Fed will up the ante with a 75bps hike has resurfaced with a vengeance. That’s not good for bullion. Back in early March, the precious metal was trading close to a record above $2,000/oz as the invasion of Ukraine provided a boost. Now, its headed back toward $1,800/oz as the dollar marches upward and 10-year Treasury yields sit near 3%. Gold’s cheaper sidekick, silver, has been hit by the same dynamic and sank to the lowest level in almost two years earlier this week.
- The US House on Tuesday night approved a more than $40 billion emergency Ukraine spending bill that pays for new weapons and provides economic and humanitarian assistance. The 368 to 57 vote underscores bipartisan support for Ukraine in a Congress deeply divided on most other issues. The legislation, which is significantly larger than the $33 billion aid package President Joe Biden requested last month, now heads to the Senate where approval is likely next week. “Given the magnitude of the terror campaign being waged against the Ukrainian people and Ukrainian democracy, we are morally obligated to ensure the brave Ukrainian fighters and the Ukrainian people have the security and economic aid they need,” House Appropriations Chairwoman Rosa DeLauro said in a statement.
- Brookfield Asset Management Inc. is nearing a takeover of emergency household repairs provider HomeServe Plc, in what would be one of the UK’s largest take-private transactions this year, according to people familiar with the matter. The deal is set to value HomeServe at about $5 billion, the people said, asking not to be identified discussing confidential information. Brookfield is hammering out final terms of a transaction and could reach an agreement in the coming days, the people said. Shares of HomeServe jumped as much as 10% on Wednesday, the biggest intraday gain in more than two weeks. They were up 9.2% at 10:10 a.m. in London, giving the company a market value of 3.6 billion pounds ($4.4 billion).
- The rout in stocks isn’t over just yet, according to Morgan Stanley strategists, who see scope for both US and European equities to correct further amid mounting concerns of slowing growth. Strategist Michael Wilson, who has long been a skeptic of the decade-long bull run in US stocks, said in a note that even after five weeks of declines, the S&P 500 is still mispriced for the current environment of the Federal Reserve tightening policy into slowing growth. According to his base scenario of “fire and ice,” he expects the S&P 500 to slide in the near term before climbing to 3,900 points next spring — which is still about 2.5% below current levels — on slowing earnings growth and elevated volatility.
- Fourteen years after splitting off its US business, Philip Morris International Inc. is pushing back into that key market in a big way — this time, with cigarette alternatives. The maker of Marlboros on Wednesday agreed to buy Swedish Match AB, a maker of nicotine pouches, for $16 billion. The move intensifies Big Tobacco’s race for leadership in smokeless products and thrusts Philip Morris into competition with Altria Group Inc., its former US operation. The deal gives Philip Morris a vast distribution network in the US, the world’s largets market for smoking alternatives, that paves the way for the rollout of other products such as vaping devices. It’s the company’s biggest step as it exits Russia following the war in Ukraine, and pivots toward smoke-free products.
- The US Navy wants to scrap nine of 16 Littoral Combat Ships built by Lockheed Martin Corp. well short of their projected service lives in order to save a projected $4.3 billion in upgrades and maintenance over coming years. That decision may get a hard look at hearings by House and Senate panels on Wednesday and Thursday. While the ships were built to spend 25 years at sea, many of those on the water are in the infancy of their naval careers. That includes the USS St. Louis, now in its third year of service life; the USS Billings and USS Indianapolis, in their fourth years; and the USS Sioux City and USS Wichita, in their fifth, according to a Navy information paper for Congress obtained by Bloomberg News.
- Allianz SE is setting aside an additional 1.9 billion euros ($2 billion) to resolve lawsuits and regulatory probes tied to the collapse of a group of its hedge funds two years ago. The additional amount is a “fair estimate” of the remaining exposure, including potential payments to resolve government proceedings, Allianz said in a statement on Wednesday. The German company is seeking a timely resolution with authorities, it added. The charges bring the total cost from the implosion of the Florida-based Structured Alpha funds to 5.6 billion euros, after the insurer announced a 3.7 billion-euro hit earlier in a first round of settlements with investors. Chief Executive Officer Oliver Baete is trying to move past the most painful chapter of his tenure, which reminded investors of the risks associated with the insurer’s giant asset management business. Andreas Wimmer, who took over as the new head of asset management after the debacle, indicated earlier this year that despite the cost, the company plans to push further into alternative asset classes and continue its focus on active fund management.
- Ukraine and Russia clashed over natural gas sent via pipelines to Europe in a spat that could disrupt supplies transiting the war-hit country for the first time since the invasion. Russian gas flowing via one of two key entry points will stop from Wednesday as occupying forces disrupt operations, the Gas Transmission System Operator of Ukraine said in a statement on its website. While the network manager added the fuel could still be rerouted to avoid disruptions, Russian gas giant Gazprom PJSC argued the switch isn’t possible because of how its system works. Russia has been sending gas via Ukraine normally despite the conflict, but orders show overall transit shipments are set to decline about 18% on Wednesday from a day earlier, with an increase in flows via the second entry point. European gas prices jumped as much as 6.8% before paring gains to trade 1.5% higher by 8:19 a.m. in Amsterdam.
- The European Union would likely move quickly to launch infringement procedures against the UK and suspend their trade agreement if Boris Johnson’s government puts forward legislation to revoke its commitments over trade with Northern Ireland, according to a person familiar with the matter. The European Commission, the EU’s executive arm in Brussels, would be responsible for recommending a course of action while the final decision on the details and timing of any measures would need the backing of member states. As well as freezing the privileged access that UK companies have to the EU single market, the commission would also halt talks over the status of Gibraltar, the person said, asking not to be identified commenting on private discussions.
- Mining giants Vale SA and BHP Group Ltd. are preparing what may be the biggest court battle yet in the debt restructuring of their joint venture in Brazil: They asked a court to let them vote as creditors in a test of Brazil’s new bankruptcy law. In separate filings obtained by Bloomberg News, the companies argue that they have no conflict of interest in the vote to decide on a plan proposed by creditors, even though they each own 50% of the venture, Samarco Mineracao SA. They cite the view of two top restructuring lawyers, Eduardo Secchi Munhoz and Marcelo von Adamek. The new bankruptcy law, which took effect last year, allows creditors for the first time to present their own restructuring plans. The previous law only permitted the company itself to offer a proposal, and shareholders with a stake bigger than 10% were considered to have a conflict of interest and not allowed to vote.
- Panasonic Holdings Corp. said it plans a potential stock market listing for its supply chain management arm, as it seeks to increase the independence of its operating businesses. Panasonic said a listing would be an optimal way to accelerate growth of the unit globally and the business would be centered around Blue Yonder, which it acquired last year. With additional capital, the company can build up its capabilities in digital supply chain technology with research, recruiting and possibly acquisitions. Panasonic bought full control of Blue Yonder last year for about $7 billion, after it took a minority stake in the firm in 2020. Blue Yonder, founded in 1985, makes supply-chain management software and uses artificial intelligence to predict product demand.
- The big news the Financial Times got out of Elon Musk at its Future of the Car summit was decidedly unrelated to cars. The billionaire planning to take over Twitter said he would reverse the platform’s permanent ban of former President Donald Trump. But Tesla’s chief executive officer also made plenty of headline-worthy comments about the world’s most valuable auto company. Musk said he’ll stay at Tesla “as long as I can be useful,” assuaging concern that a foray into social media will compromise the amount of attention the world’s richest man devotes to his electric car company. Tesla has long been clear that it’s highly dependent on Musk, who’s been CEO since 2008. Musk estimated China will probably account for 25% to 30% of Tesla’s business in the long term. He brushed off the idea that acquiring Twitter could cause political complications for Tesla in the country, as space industry rival Jeff Bezos suggested a couple weeks back.
- The backers of the TerraUSD algorithmic stablecoin are trying to raise about $1.5 billion to shore up the token after it crashed from its dollar peg, according to Kumar Gaurav, the founder and chief executive of crypto liquidity provider Cashaa. Investors in the proposed deal will be able to buy the Luna coin at a 50% discount to the spot price, Gaurav said in an interview. They’ll be subject to a one-year lockup and a monthly “linear vest” over 12 months, he added. Luna, the token that’s part of the peg mechanism for TerraUSD, has tumbled 93% over the past 24 hours to $2.18 as of 12:15 p.m. in London, according to CoinMarketCap data. Cashaa is among prospective investors that received the proposal from the Luna Foundation Guard, Gaurav said, adding that his firm won’t participate. The LFG didn’t immediately respond to requests for comment. The Block reported on the fundraising plans earlier
- Toshiba Corp. has chosen additional banks to help it evaluate takeover interest, as Blackstone Inc. explores teaming up with KKR & Co. on a joint bid for the Japanese conglomerate, people with knowledge of the matter said. The Tokyo-based company plans to bring on JPMorgan Chase & Co. and Mizuho Financial Group Inc. to work alongside Nomura Holdings Inc. as it weighs strategic alternatives including a privatization, the people said. Toshiba could announce the appointments as soon as this week, according to the people, who asked not to be identified because the information is private. CVC Capital Partners and Bain Capital have also been weighing potential offers for Toshiba, Bloomberg News has reported. CVC is speaking to several buyout firms as well as local Japanese funds, including some with state backing, about joining forces, the people said.
- Johnson & Johnson appointed longtime company veteran Thibaut Mongon to become chief executive officer of its new consumer health business following the planned separation from the conglomerate. Mongon, a two-decade veteran of J&J, will take the helm of the new consumer health company upon the completion of the separation, which is expected in 2023, according to a statement. Since 2019, he’s served as an executive vice president and worldwide chairman of J&J’s consumer health business, which includes brands such as Tylenol, Neutrogena and Listerine. J&J said it also tapped Paul Ruh to serve as chief financial officer of the consumer health company. He has been serving as the CFO of J&J’s consumer business for the past five years, a position he took on after working as a financial executive at PepsiCo Inc.
- Global bonds rallied as traders look to US inflation data for clues on the pace and size of future Federal Reserve interest-rate hikes. The yield on 10-year Italian debt fell 11 basis points to 2.89%, while 10-year Treasury yields fell as much as 7 basis points to 2.92%, extending a drop from a more-than three-year high less than a week ago. Traders are looking for signs of easing price pressures in US consumer-price data due later on Wednesday to help gauge whether the Fed’s attempts to get soaring inflation under control are working. Analysts expect the Consumer Price Index to rise an annual 8.1% rate in April, compared with 8.5% in March, according to the median estimate in a Bloomberg survey.
“Don’t be afraid to give up the good to go for the great.” -John D. Rockefeller
*All sources from Bloomberg unless otherwise specified