May 17, 2022

Daily Market Commentary

Canadian Headlines

• BHP Sees ‘Strong Case’ for Expansion at Canada Potash Project. BHP Group has begun studies for Stage 2 at the Jansen potash project, which would add around an additional 4 million tons per year, according to copy of speech by CEO Mike Henry at industry conference Tuesday. Co. is also looking at potential to accelerate Jansen Stage 1 first production into 2026. Stage 2 is expected to achieve an internal rate of return of 18% to 20% and a payback period of around four years at long term consensus prices. “If markets suit, we may be able to bring this product to market more quickly”.  At current prices, and if all four potential stages at Jansen are developed, the business could generate about $4b-$5b a year.
• Startup Funding Set to Slow in Canada as Volatility Hits Home. Investments in Canadian startups reached C$4.5 billion ($3.5 billion) in the first quarter, the second-highest level on record, but the pace is slowing as the stock market correction makes deals less appealing, according to an industry group. “Venture capital activity in 2022 will likely see a delayed reaction to the slowdown experienced on public markets,” according to the Canadian Venture Capital and Private Equity Association. About 70% of the venture investments went into the information, communications and technology sector, the CVCA said. “I think a lot of that activity was residual from the fourth quarter of last year,” Kim Furlong, the association’s chief executive officer, said in an interview. “We’re seeing some slowdown on that front.” Divestments dropped significantly during the quarter, with only 12 exits and no initial public offerings. In the report, Furlong described the slowdown as “as a period of waiting for both investors and companies in a choppy public market.” The stock market decline has weighed on valuations, making IPOs less appealing to investors who are factoring in higher inflation, rising interest rates and geopolitical risks. The S&P 500 has dropped 15.9% this year and some traders don’t see the market bottoming out yet.

World Headlines

• European equities advanced as enticing valuations, a relaxation of Shanghai’s lockdowns as well as optimism over the easing of China’s corporate crackdown outweighed rising concerns about stagflation. The Stoxx Europe 600 rose 1.5% at 11:43 a.m. in London. Technology stocks outperformed sectors as peers in Hong Kong surged and Nasdaq 100 futures rallied. Basic resources and financial services also led gains. Equities were also buoyed by data showing the euro-area economy expanded more than initially estimated at the start of the year as the region moved past a wave of Covid-19 infections and defied headwinds from the early days of the war in Ukraine.
• Asian stocks advanced amid hopes for an unwind of Chinese lockdowns that have hurt the global economic outlook as well as a dialing back of Beijing’s regulatory crackdowns. The MSCI Asia-Pacific Index climbed as much as 1.5%, on track for a third day of gains. Chinese tech giants Tencent and Alibaba contributed most to the gain, while chipmakers TSMC and Samsung also helped. Shanghai reported no new Covid infections in the broader community for a third day, hitting a crucial milestone toward reduced restrictions. China’s top political advisory body is hosting a meeting Tuesday with some of the nation’s largest private-sector firms, sparking hopes for an improved business climate.
• Contracts on the S&P 500 bounced back after a Wall Street drop, while futures on the tech-heavy Nasdaq 100 jumped more than 2%. Citigroup Inc. rose 4.5% in premarket trading Warren Buffett’s Berkshire Hathaway took a stake in the lender. Tech names including Advanced Micro Devices Inc. Tesla Inc. and Qualcomm Inc. were among the biggest pre-market gainers.
• Bond investors see inflation subsiding from recent highs, even as commodity prices continue to rise, underscoring the view that central banks are likely to risk recessions to tame cost pressures. The five-year breakeven rate — a key indicator of debt-market expectations for inflation — has slipped 60 basis points since its recent peak on April 22, to just 3.08%. Wheat futures have jumped 18% over the same period while crude oil is up 11%.
• Treasuries decline, led by the short-end, as money markets raise Fed policy tightening wagers after hawkish comments by ECB’s Knot. US 2-year yield climbs 6bps to 2.63%; 2s10s curve flattens 2.5bps to 28bps.
• Oil edged higher in its longest run of daily gains since February as traders weighed strength in key petroleum products markets and as China continued to grapple with its virus outbreak.  West Texas Intermediate traded near $115 a barrel after rallying about 14% over the previous four sessions. US retail gasoline prices topped $4.50 a gallon for the first time, just a couple of weeks ahead of the summer driving season. It comes amid widespread tightness in oil product markets across the globe.
• Gold Holds Above $1,800 as Pause in Dollar Rally Eases Pressure. Gold steadied after dipping to a three-month low during Monday, as investors look for fresh direction from the dollar and bond yields. The greenback continued to decline Tuesday, after reaching a two-year high on May 12. It’s still up more than 6% this year, putting pressure on the gold price. Several Federal Reserve officials will speak on Tuesday, including Chair Jerome Powell. Their comments will be eyed for any clues on outlook for monetary policy. Meanwhile, messaging from China remains mixed as authorities there look to counter Covid lockdowns which have slowed the economy with promises of stimulus and monetary easing. Gold had edged up to $1,826.11 an ounce as of 9:09 a.m. in London, after finishing the previous session 0.7% higher.
• Cobalt is set to join the list of battery metals facing a supply squeeze as mine development fails to keep pace with booming demand from electric vehicles. By 2024, demand for the metal will outstrip supply, according to a report from the Cobalt Institute. Consumption will almost double in the next five years, with most of that driven by EVs. Like nickel and lithium, cobalt requires a large increase in mining capacity to keep pace, but supply growth is likely to tail off from 2024, the institute said. That comes after a broad rally in battery metals, with cobalt prices doubling over the past year. That’s prompted Tesla Inc. Chief Executive Officer Elon Musk and other automakers to warn that soaring materials prices and supply-chain bottlenecks threaten to limit EV rollout. The Democratic Republic of Congo, which accounted for 74% of mine output in 2021, will remain the dominant source of new supply. It’s a notoriously difficult jurisdiction to operate in, and the industry has come under scrutiny for dangerous working conditions and human rights abuses. That’s driven battery makers to use less of the metal, preferring chemistries that use more nickel or iron. Still, that didn’t stop EVs becoming the biggest source of cobalt demand for the first time in 2021, according to data from the Cobalt Institute. Previously the largest component of demand was from consumer electronics like laptops and phones.
• Wheat declined in Chicago as India eased some export curbs to help traders meet prior commitments. Consignments handed over to customs for examination on or before May 13, would be allowed to be exported. India’s surprise ban trapped about 1.8 million tons of wheat at ports, leaving traders the option to sell in the domestic market at a loss, Reuters reported.
• Copper: The Philippines gave the all clear to develop the Tampakan mine, one of the top copper and gold reserves in Southeast Asia, after an open-pit mining ban was lifted. The project, which will start development this year, may yield an annual 375,000 tons of copper and 360,000 ounces of gold in concentrate over a 17-year period.
• China’s steel demand may surge 10% in the second half, boosted by policies to support growth, Mysteel said. Citi isn’t convinced. It sees the need for stimulus to support consumption amid weak property sales and starts. The CISA expects China will keep its curbs on new steel capacity.
• Palm Oil Farmers Rally to Protest Indonesia’s Ban on Exports. Hundreds of smallholders in Indonesia, the world’s biggest palm oil shipper, rallied to protest against a ban on exports of the commodity, piling pressure on President Joko Widodo to scrap the policy. Farmers said their income is suffering because prices of fresh fruit bunches have plummeted on concern that the country won’t have enough storage capacity to hold the pent-up supply. At least 120 farmers attended the rally, and as many as 250 from across the archipelago are expected to turn up, said Gulat Manurung, chairman of the Indonesian Oil Palm Farmers Association
• The euro-area economy grew more than initially estimated at the start of the year as the region moved past a wave of Covid-19 infections and defied headwinds from the early days of the war in Ukraine. The euro-area economy grew more than initially estimated at the start of the year as the region moved past a wave of Covid-19 infections and defied headwinds from the early days of the war in Ukraine.
• US Treasury Secretary Janet Yellen issued a call for large-scale economic assistance to Ukraine, warning that the amounts of help pledged to date won’t even meet short-term needs as the nation struggles with the devastation wrought by Russia’s invasion. The US, which assembled the Marshall Plan to help much of Europe recover after World War II, is currently preparing a $40 billion package for Ukraine, expected to win final passage in the Senate as soon as Wednesday.
• Investors are piling into cash as the outlook for global growth drops to an all-time low and stagflation worries mount, according to a Bank of America Corp. fund manager survey that points to continued stock-market declines. Cash levels among investors hit the highest level since September 2001, the report showed, with BofA describing the results as “extremely bearish.” The survey of investors with $872 billion under management also showed that hawkish central banks are seen as the biggest risk, followed by a global recession, and stagflation fears have risen to the highest since 2008.
• Elon Musk declared he won’t proceed with his $44 billion takeover of Twitter Inc. unless the social media giant can prove bots make up fewer than 5% of its users, casting yet more uncertainty over the deal. The billionaire tweeted “this deal cannot move forward” unless Twitter provides proof of its claims, reiterating his own view that the ratio is far higher.
• Home Depot Inc. boosted its outlook for the year after a surprise increase in first-quarter revenue amid continued strong demand for home-improvement supplies despite rising mortgage rates. Same-store sales, a key retail metric, rose 2.2% in the first quarter. The company faced tough comparisons from a year ago, when stimulus checks spurred consumer spending. Analysts surveyed by Bloomberg had anticipated a decline of 2.4%.
• Warren Buffett’s Berkshire Hathaway Inc., which cut many bank holdings as the pandemic bore down on the US, is back with a roughly $2.9 billion bet on Jane Fraser’s Citigroup Inc. even as it said goodbye to a long-time stake in Wells Fargo & Co. The company also added a $2.61 billion bet on Paramount and a nearly $390 million stake in Ally Financial Inc., according to a regulatory filing Monday. Buffett’s firm also disclosed new stakes in McKesson Corp., Markel Corp. and Celanese Corp.
• Walmart Inc.’s first-quarter profit fell short of Wall Street’s expectations as the company wrestled with more supply-chain snarls and rising labor costs. Adjusted earnings fell to $1.30 a share during the three months ended in late April, Walmart said in a statement Tuesday as it reported results. That trailed the $1.48 average of analyst estimates compiled by Bloomberg. The retailer now sees profit falling by about 1% this year, compared with a prior view of mid-single-digit gains. The shares sank 6.3% in early trading at 7:10 a.m. New York time. Walmart had gained 2.4% so far this year through Monday, bucking a selloff of US stocks.  Walmart executives are scheduled to discuss the company’s results and outlook on a conference call at 8 a.m.

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*All sources from Bloomberg unless otherwise specified