May 12, 2022

Daily Market Commentary

Canadian Headlines

  • Canadian stocks sunk for a fifth straight day, closing in correction territory on Wednesday for the first time since the pandemic-induced crash in 2020, as investors flee equity markets amid rate hikes and recession concerns. The S&P/TSX Composite Index closed 0.3% lower on Wednesday and has tumbled more than 10% from its record closing price reached on March 29. Financial, technology and consumer discretionary stocks were among the biggest losers on Wednesday, offsetting gains in oil and mining companies. Canadian e-commerce giant Shopify Inc. fell 5% to its lowest point since November 2019, while retailers Canadian Tire Corp. and Loblaw Companies Ltd. dropped 4% and 3.6% respectively. This year, the Canadian market has staved off the steep losses in the US as booming commodity prices push up energy and materials stocks. The S&P/TSX has fallen 6.5% this year compared with the 17% drop in the S&P 500 Index.
  • Brookfield Asset Management Inc. said it plans to publicly list one-fourth of its asset-management business in a transaction that would value the new entity at $80 billion.  The firm expects to publicly distribute 25% of the asset manager to its shareholders before year-end, Chief Executive Officer Bruce Flatt said in a letter to shareholders as the firm issued first-quarter earnings. The special distribution of shares will be around $20 billion, or $12 per share, he said. The spinoff will separate the company that manages assets on behalf of investors across its portfolio of real estate, infrastructure, credit, private equity and renewables from Brookfield’s own investment capital of $75 billion. The move makes Brookfield “asset-light,” a model preferred by investors.
  • Manulife Financial Corp. took a hit from a new round of Covid-19 lockdowns in Asia that weighed on its business in the first quarter. Core earnings in Asia fell 5.8% to C$537 million ($413 million), the Toronto-based insurer said Wednesday. Overall adjusted profit missed analysts’ estimates.  Chief Executive Officer Roy Gori said in an interview that the unprecedented wave of infections — with daily case counts hitting as high as 77,000 in Hong Kong — hurt demand for its products even as the company offered digital options to reach customers amid heightened restrictions.

World Headlines

  • European stocks slumped on Thursday, catching up with yesterday’s selloff in the US market, as investors fled riskier assets on fears of an economic slowdown from inflation and tightening monetary policy. The Stoxx Europe 600 Index fell 2.1% by 11:34 a.m. in London, with miners and consumer products sectors among the biggest decliners, while telecoms outperformed. US stocks tumbled yesterday as data showed that inflation moderated but topped expectations at 8.3%, signaling persistent price pressures.  European stocks are poised for their fifth week of declines, the longest streak since early February, amid a flurry of risks, including economic fallout from the war in Ukraine, aggressive monetary tightening and surging inflation. Adding to concerns, the UK economy unexpectedly contracted in March as the cost of living squeeze saw consumers cut back on spending.
  • Global stocks and US equity-index futures tumbled as stubborn inflation in the world’s biggest economy bolstered the case for more aggressive monetary tightening by the Federal Reserve.  Contracts on the S&P 500 Index slid 0.5% after the equity gauge slumped Wednesday to the lowest level since March 2021. Nasdaq 100 futures lost 0.9%. The hotter-than-expected inflation reading for April raised concern the Fed’s hikes aren’t bringing down prices fast enough and policy makers may have to resort to a three-quarter point move, rather than the half-point pace markets have come to grips with. Worries such a shift would crimp economic growth, combined with Russia’s war in Ukraine and China’s struggles with Covid, are battering risk assets.
  • Asian stocks resumed their slide after Wednesday’s modest gains, as US inflation topped estimates and new Covid-19 community cases in Shanghai damped prospects for a reopening. The MSCI Asia Pacific Index fell as much as 2%, with tech giants Alibaba and TSMC weighing the most on the gauge. Chinese shares snapped a two-day advance after Shanghai found two infections outside of isolation centers, pushing back the timeline for a relaxation of growth-sapping lockdowns.  Markets appeared to be unimpressed by China’s Premier Li Keqiang’s comments urging officials to use fiscal and monetary policies to stabilize employment and the economy. Valuations for the MSCI Asia Pacific Index are hurtling toward pandemic lows as the index records a 29% decline from its 2021 peak, posting declines in all but one of the trading sessions so far this month.
  • Oil resumed its decline as financial markets were pressured by stubbornly high US inflation, bolstering the case for Federal Reserve interest rate hikes. West Texas Intermediate futures have whipsawed wildly this week, and were down 2.1% on Thursday. European equities slid, along with US futures, while the dollar rose, making commodities priced in the currency less attractive.  As oil markets continue to wrestle with the ever-changing outlook for China’s virus lockdowns and uncertainty about the European Union’s proposed ban on Russian oil imports, stockpiles of refined fuels are continuing to decline. On Thursday the International Energy Agency said that there is currently an “almost universal product shortage” and low Russian exports are worsening the tightness.
  • Gold steadied, after jumping the most in a month on Wednesday as the US reported hotter-than-expected inflation. The US consumer-price index excluding food and energy rose 6.2% in April from a year earlier, above estimates but slower than in March. Gold, which is often bought as a hedge against inflation, initially dropped after the print before closing up 0.8% as real Treasury yields sank. Bullion remains down more than 10% from a March peak as faster consumer-price gains fueled expectations that the Federal Reserve will aggressively tighten policy. Gold prices are still relatively high, a sign some investors are hedging against rate hikes pushing the US economy into recession.
  • As Russia’s invasion chokes off Ukrainian wheat exports, pushing up bread and noodle prices, the global harvest faces an added test: extreme weather. Droughts, flooding and heatwaves threaten output from the U.S. to France and India, compounding shrinking production in Ukraine. Just about every major producing region is facing one threat or another. The one notable exception is Russia, which is shaping up for a bumper crop and stands to benefit from the rising prices and limited supply elsewhere. Wheat is hardy and its vast geographical spread typically means shortages in one place can be filled from elsewhere. But the litany of challenges is testing that resilience. Analysts expect world output to drop for the first time in four seasons, according to a Bloomberg survey before a U.S. Department of Agriculture report Thursday. That’s likely to keep the price of many food staples high as hunger and cost-of-living crises deepen from Africa to Europe.
  • North Korea fired three short-range ballistic missiles from an area near Pyongyang toward waters off its east coast, South Korea said, the latest in a series of volleys ahead of a planned visit to the region next week by US President Joe Biden.  The missiles were launched at 6:29 p.m. local time Thursday, South Korea’s Joint Chiefs of Staff said in a statement, without providing additional information on the flight path. The launch was the third volley of ballistic missiles this month and came hours after leader Kim Jong Un ordered a lockdown following the country’s first reported case of Covid-19. The launch was also detected by Japan’s defense ministry. The missiles likely touched down outside of Japan’s exclusive economic zone, Japanese broadcaster NHK reported, citing an unidentified Japanese official.
  • Saudi Aramco overtook Apple Inc. as the world’s most valuable company, stoked by a surge in oil prices that is buoying the crude producer while adding to an inflation surge throttling demand for technology stocks. Aramco traded near its highest level on record on Wednesday, with a market capitalization of about $2.43 trillion, surpassing that of Apple for the first time since 2020. The iPhone maker fell 5.2% to close at $146.50 per share, giving it a valuation of $2.37 trillion. Even if the move proves short-lived and Apple retakes the top spot again, the role reversal underscores the power of major forces coursing through the global economy.
  • A massive sell-off in cryptocurrencies wiped over $200 billion of wealth from the market in just 24 hours, according to estimates from price-tracking website CoinMarketCap. The broad plunge in the crypto complex, driven by the collapse of the TerraUSD stablecoin, hit major tokens hard. Bitcoin plunged by as much as 10% in the last day to its lowest level since Dec. 2020, while Ethereum dropped as much as 16%. The carnage showed signs of spreading further Thursday as crypto-related stocks in Asia also cratered. Hong Kong-listed fintech firm BC Technology Group Ltd. closed down 6.7%. Japan’s Monex Group Inc. — which owns the TradeStation and Coincheck marketplaces — ended the day down 10%.
  • President Joe Biden marked 1 million US deaths from Covid-19 by calling on lawmakers to maintain funding for testing and treatments, saying the country “must not grow numb to such sorrow.” The US opens its second summit Thursday aimed at quelling the spread of the coronavirus just as the country passes the grim milestone and lawmakers remain unable to agree on how to pay for the fight. “We must remain vigilant against this pandemic and do everything we can to save as many lives as possible, as we have with more testing, vaccines, and treatments than ever before. It’s critical that Congress sustain these resources in the coming months,” Biden said in a statement.  The US is co-hosting the summit as the world grapples with how to cope with a glut of vaccines and bottlenecks that are keeping them from the billions of people who still have not received shots. Low vaccination rates abroad raise the threat that new variants will arise and fuel new waves globally.
  • Pacific Investment Management Co. saw outside clients pull money for the first time since the onset of the pandemic as investors fled fixed-income securities amid rising interest rates. The giant bond manager saw 13.6 billion euros ($14.3 billion) go out the door in the first quarter, contributing to a 4.5% drop in outside money overseen at Allianz SE’s asset management businesses, the Munich-based insurer said Thursday. The outflows — mainly from fixed income but some also from equities — were the first quarterly net redemptions for Pimco since the start of 2020, when investors pulled 43 billion euros. The results reflect a challenging beginning to the year for asset managers, as a global market rout saw the S&P 500 Index post its worst first four months of a year since 1939, while the bond market selloff continued amid aggressive monetary tightening. Allianz Chief Financial Officer Giulio Terzariol said he expects Pimco’s outflows to continue for now and turn into inflows once interest rates stabilize on a higher level.
  • A global shipping industry that’s experiencing the strongest and most turbulent market in memory faces a potential slowdown later this year. That was among the messages from Hamburg-based Hapag-Lloyd, Germany’s largest container carrier. Early Thursday, it reported surging revenue and profit in the first quarter on transport volumes that were little changed from a year earlier, confirming guidance laid out April 28. Global supply chains “continue to be under significant pressure — not least because of the recent measures taken in China in response to Covid-19 outbreaks,” the statement said. “This situation is expected to improve in the second half of the year.”
  • The UK and EU failed to resolve their differences over Northern Ireland’s trading arrangements in crunch talks on Thursday, further risking a diplomatic crisis and potential trade dispute. Foreign Secretary Liz Truss told European Commission Vice-President Maros Sefcovic on a call that current arrangements are causing “unacceptable disruption to trade,” leading to people in Northern Ireland being treated differently to those in mainland Great Britain, according to a readout of the discussion emailed by the Foreign Office. Sefcovic “confirmed that there was no room to expand the EU negotiating mandate or introduce new proposals to reduce the overall level of trade friction,” according to the statement. Truss, for her part, “noted this with regret and said the situation in Northern Ireland is a matter of internal peace and security for the United Kingdom, and if the EU would not show the requisite flexibility to help solve those issues, then as a responsible government we would have no choice but to act.”
  • Siemens AG said profit fell during its second quarter after sanctions against Russia caused a 600 million euro ($631 million) hit to the engineering giant, which said it’s started to wind down activities in the country. Net income during the first three months of 2022 fell more than 50% to 1.03 billion euros, a drop of more than 50% from the previous year, Siemens said Thursday. That fell short of analyst expectations of 1.52 billion euros. The German train maker said the hit to its business in Russia was mainly in its mobility division and that the company has initiated an “orderly wind down” of industrial activities in the country. It didn’t provide details of how it would orchestrate such an exit, which is proving difficult for a range of companies as the impact of U.S. and European sanctions sends shock waves through the economy.
  • The European Union’s top diplomat, Josep Borrell, is pushing member states to boost the amount of Ukrainian military aid the bloc will finance by 500 million euros ($522 million) to 2 billion euros, according to people familiar with the discussions. Member states have yet to agree to the proposal regarding the European Peace Facility, with Germany the main holdout at a meeting of EU political and security ambassadors this week, said the people, who asked not to be identified because the talks are private. Berlin isn’t against the proposal, but the government needs to go through the proper procedures, including parliamentary approval, and couldn’t immediately sign off on the new funding, a German official said. A small group of other nations, along with Germany, also indicated that a new tranche of money wasn’t urgent because reimbursements are paid out after weapons are delivered, the people said.
  • HSBC Holdings Plc has begun an internal review that’s part of an effort to rebut calls from its largest shareholder to discuss splitting off its Asian operations. The London-headquartered bank is examining the case for a break up after Bloomberg reported late last month that Ping An Insurance (Group) Co. was pushing the lender to spin off its Asian unit to improve returns, according to people familiar with the matter, who asked not to be identified discussing private information. Executives are against the idea of splitting up HSBC but have begun the analysis in an effort to push back against Ping An’s argument that the bank’s investors would do better from being able to choose to invest in a pure-play Asian business headquartered in Hong Kong.
  • Growth stocks, including the battered tech sector, will likely remain under pressure as central banks tighten monetary policy, driving yields higher, according to Citigroup Inc. strategists. “Now that central banks are unwinding monetary support, growth stocks’ valuations have further to fall,” strategists including Robert Buckland wrote in a note. They are especially wary of growth stocks in the US, where the tech-heavy Nasdaq 100 has slumped to November 2020 lows and is down 27% this year. Stocks that are valued on future earnings growth, and especially tech, have been leading the selloff in global equities over the past weeks. As the Federal Reserve embarks on interest rate hikes to tame surging inflation, expensive growth shares have suffered as higher rates mean a bigger discount for the present value of future profits. This marks a shift in investor outlook after tech stocks had been some of the market’s best performers for years.
  • Apple Inc. is on course to open more than 20% below its January peak as a selloff in technology stocks spreads from more speculative shares to the world’s biggest companies. Shares in the iPhone maker fell as much as 1.6% in premarket trading on Thursday. Through the close, Apple erased about $600 billion in market value since the Jan. 3 record, amid a broader rout for tech stocks spurred by concerns about inflation and rising interest rates.
  • Millions of US students just found out how much they’ll have to pay on student loans for the coming school session — and it’s a lot more than last year. Interest charges on student debt are set each year pegged to the Treasury’s May auction of 10-year notes. This year’s version took place yesterday, and the debt was sold at a yield of 2.943% — reflecting the recent surge in borrowing costs as the Federal Reserve tightens monetary policy. That means the benchmark for college loans is up by more than 125 basis points from the academic year that’s just finishing — and back to around where it was in 2018-19.
  • Two months after negotiators left Vienna, expectations are fading that Iran nuclear talks will resume, leaving the world with the remains of an agreement no one’s willing to pronounce dead.  A media tent erected in anticipation of a grand announcement has been quietly dismantled, showy multilateral pow-wows in the Austrian capital giving way to furtive messages exchanged between the US and Iran via the European coordinator.  European Union envoy Enrique Mora is in Tehran this week for a last-ditch effort to revive the landmark 2015 accord, which curbed Iran’s nuclear activities in return for sanctions relief, including on oil.
  • Beijing officials denied the city will be locked down and urged people not to hoard food as residents flocked to grocery stores amid growing concern the Chinese capital’s response to a persistent Covid-19 outbreak is about to be intensified.  Speculation that Beijing will be locked down or put into a “quiet period” are rumors, Xu Hejian, a spokesperson for the Beijing municipal government said at a press briefing on Thursday. The city’s some 20 million residents don’t need to be nervous about food supply and deliveries aren’t halted, Xu said. The yuan weakened offshore late Thursday as rumors of the lockdown took hold, recovering some of its losses after the official denial to trade down 0.7% versus the dollar as of 6:45pm local time.
  • BT Group Plc set out a route to sell pay-TV unit BT Sport to American media giant Warner Bros Discovery Inc., cementing a reversal after its high-profile entry into football rights a decade ago. Alongside in-line full-year results Thursday, London-based BT said it and Warner Bros. Discovery will create a new 50-50 sport TV joint venture, combining Premier League football rights with Eurosport into a new bundle that will have a single brand in the future.  BT will transfer its pay-TV operating businesses to the US firm and receive £93 million ($113 million) cash up front as well as £540 million in the future, subject to certain earn-out conditions which it didn’t specify.
  • Instacart Inc., the largest online grocery delivery platform in the US, said it confidentially filed documents for an initial public offering. The San Francisco-based company didn’t disclose details of its IPO plans in a statement Wednesday confirming an earlier report by Bloomberg News. A listing could happen as soon as this year though the timing could slip, said people familiar with the matter who asked not to be identified discussing private information. The deliberations are ongoing and the company could still remain private, they said.

“If you’re offered a seat on a rocket ship, don’t ask what seat! Just get on.” -Sheryl Sandberg

*All sources from Bloomberg unless otherwise specified