May 16, 2022

Daily Market Commentary

Canadian Headlines

  • The global lithium industry needs as much as $42 billion of investment by the end of the decade in order to meet demand for the crucial battery-making material, with attempts to build supply chains outside of China subject to much higher costs, according to a data and market-intelligence provider.  The sector will require $7 billion of investment each year from now until 2028, Benchmark Mineral Intelligence said in a report. That would help it meet forecast demand of 2.4 million tons a year by 2030, which is four times higher than the 600,000 tons that’s estimated to be produced in 2022. In the U.S., the Biden administration has been pushing to accelerate production of key battery metals, with more than $3 billion in grants to help process elements including lithium. Meanwhile, Canada has also earmarked up to C$3.8 billion ($2.9 billion) in this year’s budget to build a domestic critical metals supply chain.
  • New cases of highly pathogenic avian influenza have been confirmed in flocks in Saskatchewan and Alberta, the Canadian Food Inspection Agency says. Cases confirmed on May 11 in a small flock in Saskatchewan’s rural municipality of Aberdeen and in Alberta’s Foothills County, CFIA says Friday in emailed statement. Additional primary control zones to limit the spread of the virus will be created as required, CFIA says. Canada has more than 1.8 million birds impacted by the avian influenza as of May 12, CFIA data show
  • Sun Valley Gold reported a new position in Iamgold Corp. in the first quarter, buying 1.1 percent of the company’s outstanding stock. The hedge fund manager reported 5.15 million shares with a current market value of $11.2 million, according to its 13F filing with the Securities and Exchange Commission.


World Headlines

  • European stocks pared earlier declines as investors weighed robust earnings growth and more appealing valuations against weaker-than-expected economic data in China. The Stoxx Europe 600 Index was down 0.1% at 9:21 a.m. in London, trimming earlier losses of as much as 0.8% after a rally on Friday helped the index snap a four-week losing streak. Personal care and travel and leisure sectors were among the biggest decliners, while miners and telecoms outperformed.
  • Asian stocks eked out gains as surprisingly weak Chinese economic data spurred volatility and caused traders to reassess their outlook on the region. The MSCI Asia-Pacific Index was up 0.1%, paring an earlier advance of as much as 0.9%. The region’s information technology index rose as much as 1.5%, with TMSC giving the biggest boost. A sub-gauge on materials shares fell the most. Equities in China led losses, as Beijing’s moves to cut the mortgage rate for first-time home buyers and ease lockdown restrictions in Shanghai failed to reverse the downbeat mood. Asian stocks were trading higher early Monday, building on Friday’s rally, only to trim or reverse gains as data showed a sharper-than-expected contraction in Chinese activity in April.
  • Contracts on the S&P 500 and Nasdaq 100 dropped, but were off the session’s lows. Tech heavyweights including Apple Inc., Microsoft Corp. and Netflix Inc. declined in premarket trading following a bounce on Friday, while Twitter Inc. shares were on course to wipe out all their gains since billionaire Elon Musk disclosed his stake in the social media platform.
  • China’s economy is paying the price for the government’s Covid Zero policy, with industrial output and consumer spending sliding to the worst levels since the pandemic began and analysts warning of no quick recovery. Industrial output unexpectedly fell 2.9% in April from a year ago, while retail sales contracted 11.1% in the period, weaker than a projected 6.6% drop. The unemployment rate climbed to 6.1% and the youth jobless rate hit a record.
  • In the bond market, the 10-year US yield was little changed around 2.93%. A key question is whether economic worries will help stem this year’s Treasury selloff, which has been driven by inflation and tightening US monetary settings. Yields on European bonds rose.
  • The risk of an economic downturn amid price pressures and rising borrowing costs remains the major worry for markets. Goldman Sachs Group Inc. Senior Chairman Lloyd Blankfein urged companies and consumers to gird for a US recession, saying it’s a “very, very high risk.” Traders remain wary of calling a bottom for equities despite a 17% drop in global shares this year, with Morgan Stanley warning that any bounce in US stocks would be a bear-market rally and more declines lie ahead.  “Trying to time the market is likely to prove time-consuming and loss-making,” said Mark Haefele, chief investment officer at UBS Global Wealth Management. “Investor sentiment is fickle, and markets are likely to remain choppy until we get greater clarity on the three Rs: rates, recession, and risk.”
  • Warnings about the fallout from faster inflation have grown louder. Bond market veteran Mohamed El-Erian said stagflation is the base line scenario for the US economy. Goldman Sachs Senior Chairman Lloyd Blankfein said a recession there is a “very, very high risk.” Analysts at the US bank have shifted their preference to better-rated Asian bonds over high-yield notes, citing concerns about headwinds for the global economy. “The acceleration of the market pullback seems to indicate that investors are starting to anticipate a ‘hard-landing’ of the global economy,” said Charles-Henry Monchau, chief investment officer at Banque Syz in Geneva. “They fear that central banks will fail to tame inflation without triggering a recession or sharp economic downturn.”
  • Oil retreated for the first time in four sessions as Covid-19 lockdowns strained the economy in China, the world’s biggest crude importer. West Texas Intermediate slid to trade near $110 a barrel, reversing earlier gains. China’s industrial output and consumer spending slumped in April to the worst levels since the pandemic began, while apparent oil demand and crude processing plunged. Strict lockdowns to halt the virus have curbed fuel use. The oil market has been gripped by a tumultuous period of trading since late February due to China’s virus resurgence and Russia’s invasion of Ukraine. The war has boosted the cost of food and fuels, with surging US retail gasoline and diesel prices helping fan the fastest inflation in decades.
  • Gold extended losses below $1,800 after its biggest weekly drop in almost a year as a hawkish turn by central banks worldwide hits demand for the non-interest bearing metal. Bullion slid as much as 1.4% on Monday to the lowest since January, with the metal’s appeal damaged by a rally in the greenback, amid losses across risk assets. Rising Treasury yields have also impacted gold, amid signs that central banks worldwide will implement an aggressive cycle of monetary tightening.
  •  NATO members rallied around Finland and Sweden on Sunday after they announced plans to join the alliance, marking another dramatic change in Europe’s security architecture triggered by Russia’s war in Ukraine. Parliaments in the Nordic nations are gearing up to debate membership on Monday morning, with a large majority of lawmakers in each country now backing the bid. Over the weekend, most NATO foreign ministers who had gathered in Berlin embraced the bloc’s northern enlargement, a process that requires unanimity among the 30 allies.
  • Wheat jumped by the exchange limit to near a record high after India’s move to restrict exports, exposing just how tight global supplies are during the war in Ukraine and threatening to drive up food prices even more. The government will suspend overseas sales to manage its food security, according to a notification dated May 13. This drew criticism from the agriculture ministers of the Group of Seven nations, who said that such measures make the world’s crisis worse. Benchmark futures in Chicago rose as much as 5.9% to $12.475 a bushel, the highest in two months and within about $1 of the all-time high set just after Russia’s invasion. Prices have surged around 60% this year, increasing the cost of everything from bread to cakes and noodles. In Paris, milling-wheat rose 5.1% to 431.75 euros ($450) per ton, a record for most-active futures.
  • Iron ore futures reversed earlier losses and closed higher in China as the nation’s economic support and easing of some virus curbs aided demand prospects, following a slower steel output last month. Iron ore futures in Dalian closed 1.4% higher to 834.5 yuan a ton, after declining for six consecutive weeks. Prices in Singapore climbed 1.4% to $128.70 as of 3:03 p.m. local time, after the biggest weekly drop since mid-February. Steel rebar and hot-rolled coil futures were little changed in Shanghai.
  • Copper traded 1.1% higher to $9,259 a ton on the London Metal Exchange as of 9:36 a.m. in London, after rising as much as 1.4% earlier. Aluminum, zinc, lead and tin all gained more than 1%. Nickel slid 1.7% as Zhejiang Huayou Cobalt. Co, a major battery-material producer, restarted nickel plate production after updating some facilities, it said on its WeChat channel.
  • McDonald’s Corp. said it will pull out of Russia after more than 30 years of operation in the country, stepping up the corporate response to the invasion of Ukraine. The company has initiated a sale process after temporarily closing its restaurants, the company said in a statement Monday. McDonald’s said it will take a write-off of $1.2 billion to $1.4 billion for the move. McDonald’s is pursuing a sale of its entire portfolio of restaurants to a local buyer and will “de-arch” the outlets, removing the McDonald’s name, logo, branding and menu, though the company will retain its trademarks in Russia. The company didn’t name a potential buyer.
  • JetBlue Airways Corp. made a hostile $3.26 billion takeover bid for Spirit Airlines Inc., seeking to block the discount carrier’s agreed takeover by Frontier Group Holdings Inc. The JetBlue offer is worth $30 a share in cash, $3 lower than its initial approach, and the New York-based company said in a statement Monday it would be prepared to pay the higher price should Spirit management agree to a “consensual transaction.”. JetBlue also urged Spirit’s shareholders to reject the Frontier merger at a meeting scheduled for June 10, saying the proposed deal is “high risk and low value.”
  • Renault SA agreed to transfer its 2.2 billion-euro ($2.3 billion) Russian business to state entities for a symbolic sum in what amounts to a nationalization triggered by the war in Ukraine. The French carmaker’s majority stake in carmaker AvtoVaz — which produces the top-selling Lada brand — will go to a state-run automobile research institute known as NAMI, while the Moscow City government will take over an assembly plant near the Russian capital, according to a statement Monday.
  • The US Commerce Department is deepening its probe into whether solar power companies are circumventing import tariffs, singling out some of the industry’s giants for increased scrutiny. The agency identified eight manufacturers, including industry leaders Longi Green Energy Technology Co., Trina Solar Co. and Jinko Solar Co., for mandatory questionnaires to plumb for more information on whether they are skirting US tariffs on China-made solar products by assembling them in Southeast Asia. The probe has already roiled the US solar industry and thrown a wrench into decarbonization plans, with companies halting projects and canceling shipments in the face of potentially hefty extra tariffs. The world’s largest solar manufacturers, mostly based in China, are diverting their focus and products to the rising European market amid the US disruptions. Shares of major Chinese solar companies fell on Monday, with Jinko stumbling as much as 5.3%, Trina dropping 4.1% and Longi 2.5% in Shanghai.
  • Earnings from big-box retailers may shed further light on consumer spending patterns. Walmart and Target results are on tap tomorrow and Wednesday, and Home Depot, Lowe’s and Kohl’s also report this week. Other names includes Applied Materials, Cisco, Deere and Tencent.
  • Saudi Aramco posted its highest profit since its IPO after oil prices and output jumped. Net income of $39.5 billion was up 82% from a year earlier. Free cash flow rose to almost $31 billion, though it opted to keep its dividend unchanged at $18.8 billion.
  • Tesla delayed plans to restore Shanghai production to pre-lockdown levels by at least a week, Reuters said. It also recalled more than 100,000 cars in China on software concerns.

“It is the mark of an educated mind to be able to entertain a thought without accepting it.” – Aristotle

*All sources from Bloomberg unless otherwise specified