May 17, 2023
Daily Market Commentary
- South Korean company SK Ecoplant Co. will invest in and help develop a $4.5 billion green hydrogen project in Canada that’s set to be one the largest such plants in the world. The renewable energy unit of SK Inc. will buy a 20% stake in the facility in the eastern province of Newfoundland and Labrador for $50 million, it said in a statement. The project will produce green hydrogen and then covert it to ammonia to be exported to Europe from 2026, it said. The announcement came during Prime Minister Justin Trudeau’s visit to South Korea this week. Canada is trying to position itself as a major producer, user and exporter of hydrogen. It signed a green hydrogen supply pact with Germany last year, and also has a separate $6 billion project to produce the fuel in Nova Scotia, another eastern province.
- Shifting fires across Canada’s main energy-producing province are prompting drillers to throttle back production once again — more than a week after the blazes began — and officials are warning of worsening conditions ahead. Athabasca Oil Corp. joined Chevron Corp., Crescent Point Energy Corp. and others in reporting renewed shutdowns in Alberta due to the fires. Industry consultant Rystad Energy estimates natural gas curtailments have reached the equivalent of about 250,000 barrels of oil output a day. While the total number of active wildfires in Alberta declined to 86 on Tuesday afternoon, down from 90 a day earlier, the number of out-of-control blazes ticked up by one to 24. Smoke from the fires drifted to Calgary, where most of Canada’s energy producers are based, shrouding the city in smog.
- European stocks were subdued by lingering concerns about a standoff in US debt-ceiling negotiations, with investors also assessing the outlook for inflation and the possibility of a recession. The Stoxx 600 was down less than 0.2% at 10:24 a.m. in London, as April’s final inflation print for the euro area showed the headline rate rose a touch to 7.0%, while the core reading fell slightly to 5.6% from 5.7%. London Stock Exchange Group Plc was among the biggest laggards after a consortium of investors including Blackstone Inc. and Thomson Reuters Corp. sold shares in the group. Siemens AG gained after it raised its outlook for a second time in fiscal 2023 as revenue and orders jumped. After rallying nearly 10% this year until the end of April, Europe’s equity benchmark has meandered in May on worries about higher-for-longer interest rates and a looming recession.
- Markets pointed to a recovery from a selloff on Wall Street as traders pinned hopes on talks in Washington to break a deadlock on raising the debt ceiling. The dollar climbed. US stock futures rose and Treasuries steadied as White House and congressional negotiators continued to try to resolve their differences. Anxiety that leaders in Washington will be unable to stave off a historic default before the June 1 deadline is unsettling markets. Yields rose across the US curve Tuesday, with the rate on 30-year notes climbing to around 3.9% — the highest since the turmoil affecting regional banks that erupted in early March.
- Asian stocks retreated as weaker-than-expected data from China continued to weigh on sentiment concerning the country’s economic growth outlook. The MSCI Asia Pacific Index fell as much as 0.5%, with AIA Group, Meituan and Ping An Insurance Group the biggest drags. Shares in Hong Kong were the region’s worst performers after disappointing factory output and jobless data yesterday. Key gauges in Japan, Taiwan and South Korea rose. The Hang Seng Index declined 2.1%, the most in a week, dragged lower by property and technology stocks. Tencent, which ended down 0.6%, saw large fund net outflow before its earnings report came after the market closed. Japan’s benchmarks extended gains after a better-than-expected quarterly economic growth report. The Nikkei 225 Stock Average climbed above the key 30,000 level, a day after the broader Topix benchmark ended at its highest in more than three decades.
- Oil advanced in New York as traders assessed the latest data on Chinese demand and US stockpiles, while awaiting a resolution of the debt ceiling standoff in Washington. West Texas Intermediate futures added 0.3% as stock futures gained, reversing earlier losses to trade near $71 a barrel. The International Energy Agency said on Tuesday that consumption in China is rising faster than anticipated, though some banks cut growth forecasts after weak economic data for April. Equity markets pointed to a recovery from a selloff on Wall Street as traders pinned hopes that talks will break a deadlock on raising the debt ceiling and avert a potentially catastrophic default.
- Gold held near a two-week low as traders tracked talks to resolve the US debt-ceiling impasse and dissected comments from a slew of Federal Reserve officials on the outlook for interest rates. Bullion steadied near $1,990 an ounce after falling 1.4% on Tuesday to the lowest close since May 1, following robust US retail sales figures and speculation the debt fight may be resolved. President Joe Biden and congressional leaders said they were optimistic a deal was possible, even as House Speaker Kevin McCarthy warned that the two sides remained far apart. Gold has rallied about 9% this year, making it the best-performing major commodity, with prices surging to within $15 of their all-time high earlier in May. The gain has been underpinned by speculation that the Fed’s tightening campaign is now done, paving the way for a weaker dollar and lower Treasury yields, which aid bullion. In addition, the debt-ceiling fight has fanned haven demand.
- The European Banking Authority has been holding talks on ways to boost investor interest in the AT1 market after Switzerland’s shock decision to wipe out about $17 billion of Credit Suisse Group AG notes. The EBA earlier this month addressed ideas such as a ban on banks paying dividends before they consider skipping an AT1 coupon to preserve capital during times of stress, people familiar with the matter said, asking not to be identified discussing the private information. Other ideas floated at an event held by the body included a requirement to pay out skipped AT1 coupons at a later stage rather than allowing them to be canceled altogether, the people said. While the EBA helped facilitate the discussion, adopting the floated ideas would also require additional authorities to change existing EU regulation, one of the people said. The EBA doesn’t currently see a need for such steps, the person said.
- A deal allowing Ukraine to export crops from key ports via the Black Sea is set to be extended, with Russia agreeing to stay in the pact for now, according to Turkish officials. The agreement — brokered by Turkey and the United Nations — would keep open a major trade route amidst Russia’s war in Ukraine and bolster global food supplies. Moscow had threatened to withdraw from the deal if obstacles to shipments of its own crops and fertilizer weren’t removed. An announcement is expected Wednesday, said the officials, who declined to be named as the information is private.
- Sony Group Corp. plans a buyback of up to 2.03% of its shares over the next twelve months, after warning of headwinds ahead from a slump in global consumer spending. Tokyo-based Sony joins a long list of Japanese firms executing buybacks in recent weeks. The electronics and entertainment firm said it will spend as much as ¥200 billion ($1.5 billion) to buy a maximum of 25 million of its shares. Sony’s stock price reached a 52-week high this week, amid a wider rally in Japanese stocks. Its shares closed up 0.6% ahead of the announcement Wednesday.
- Debt-ceiling talks between White House and congressional aides are set to intensify as negotiators seek a framework agreement for Joe Biden and House Speaker Kevin McCarthy to review upon the president’s return from a truncated trip to Asia. The latest round of talks, launched before Biden’s departure Wednesday for a Group of Seven meeting in Hiroshima, Japan, will feature a narrower group of negotiators in hopes of yielding a deal to avert an unprecedented US default. Biden said he would call lawmakers and staff to remain apprised of the negotiations during his time abroad, and hopes to gather with congressional leaders once he is back in the country next week. The president intended to visit Australia and Papua New Guinea, but scrapped those stops in hopes of brokering an agreement.
- The Federal Trade Commission sued to block Amgen Inc.’s $27.8 billion deal to buy Horizon Therapeutics Plc Tuesday, arguing the tie-up would stifle competition for the development of treatments for serious illnesses. In a sealed complaint filed in Illinois federal court, the FTC said the acquisition would allow Amgen to entrench Horizon’s monopoly on medications for thyroid eye disease and chronic refractory gout. Horizon shares closed down 14.2% in New York trading, the most since August 2022. Amgen was down 2.4%. The complaint seeks an injunction barring the deal from closing while the FTC moves forward with an in-house trial on whether the merger violates antitrust law.
- Pfizer Inc. sold $31 billion of debt in the fourth-largest US bond sale ever, according to a person with knowledge of the matter. The pharmaceutical giant raked in over $85 billion in orders for the eight part investment-grade deal, which will finance its purchase of Seagen Inc. Pfizer and its bankers were forced to modify terms of the deal on the fly Tuesday after the US sued to block a separate multibillion-dollar debt-funded acquisition by Amgen Inc. Pfizer’s bond sale, its first since 2021, is the largest debt financing for a merger or acquisition this year, and comes amid a rush by companies to tap capital markets ahead of a potential jump in borrowing costs sparked by the US debt ceiling standoff. The longest portion of the deal, a 40-year bond, yielded 1.6 percentage point over Treasuries, lower than earlier discussions for 1.8 percentage point, said the person, who asked not to be identified as the transaction is private.
- A US recession is a virtual certainty and the Federal Reserve may lower interest rates by the third quarter as growth loses momentum, according to JPMorgan Asset Management. “The market is right to be penciling in cuts,” said Seamus Mac Gorain, head of global rates in London. “Inflation is too high and it will take a recession to bring it back down,” he said, adding that US banking woes “have only made a recession more likely.” Mac Gorain, who favors Treasuries, is siding with swaps traders who predict that the Fed will execute a policy pivot as soon as September to counter slowing growth. But the US central bank has repeatedly pushed back against this notion, raising the prospect that such bets may backfire if officials maintain a restrictive stance to subdue inflation.
- Russia is finding oil customers in Asia to replace sanctions-blocked European buyers — by clawing away at the market share of its energy allies. From West Africa to the Middle East, producers in the OPEC+ alliance are feeling pinched as buyers in India and China — Asia’s top growth markets — scoop up cheaper Russian crude. The redrawn global oil trade map could be in place for years to come. Prices for Russia’s flagship Urals grade plummeted last year as Europe shunned purchases in the fallout of Moscow’s war in Ukraine. Asia’s powerhouses stepped into the void, helping to lift Russia’s seaborne crude exports to a post-invasion record in recent weeks.
- India is unveiling a 170 billion rupee ($2 billion) financial incentive plan to draw makers of laptops, tablets and other hardware to the South Asian nation as companies look to diversify supply chains beyond China. Prime Minister Narendra Modi is capitalizing on the early success of Apple Inc.’s local assembly operations — which have helped the US company produce about 7% of its global iPhone output — to pitch the country as a viable global manufacturing hub. New Delhi wants to bring more tech production to India after China’s trade war with the US and its strict Covid policies prompted companies to weigh other options. Apple has yet to begin making iPads or MacBook laptops in India, but fresh incentives could push the Cupertino, California-based company to consider such moves. Other manufacturers who could take advantage of the new measures include Dell Technologies Inc., HP Inc. and Asustek Computer Inc.
- Target Corp. stood by its annual outlook after posting higher-than-expected profit in the first quarter, even as “softening sales trends” threaten to crimp short-term results. Earnings in the current quarter will be no more than $1.70 a share, the US retailer said in a statement Wednesday as it reported financial results. That would trail the $1.91 average of analyst estimates compiled by Bloomberg. In reiterating its annual forecast, Target cited sales strength in food, beauty products and household essentials, plus strong earnings in the first quarter. The mixed picture underscores Target’s push to regain its footing after a pandemic-era sales boom ground to a halt last year, leaving the company with stockpiles of unwanted goods. While that problem has been largely resolved, Target pointed to a worsening blow from organized retail theft, which is increasingly driving “shrink” — the industry term for when a store has fewer items in stock than in its inventory records.
- UBS Group AG is gearing up for an estimated $34.8 billion gain as a result of its emergency takeover of Credit Suisse Group AG, while warning it faces billions in potential legal and regulatory costs from the rescue of its stricken former rival. The Swiss bank stands to benefit from the combined firms’ negative goodwill, based on a first assessment it has made on data as of the end of 2022, according to a regulatory filing posted overnight in Switzerland. At the same time, UBS sees mark-downs of about $13 billion on Credit Suisse assets and is also estimating that legal liabilities may cost as much as $4 billion over 12 months. The figures are based on the bank’s best estimates now, and as further analysis is performed are likely to change, UBS said. Negative goodwill occurs when the book value of a company is more than the price paid by the acquiring firm, and can result in a profit on paper for the buyer when the deal closes.
- Broadcom Inc. offered antitrust commitments to the European Commission in an effort to allay concerns over its proposed $61 billion takeover of cloud-computing company VMware Inc.. The regulator extended its deadline to rule on the deal to July 17, according to a website filing. It gave no further details of the remedies offer, made on May 16. The transaction marks the biggest-ever takeover for a semiconductor maker and extends an acquisition spree for Broadcom Chief Executive Officer Hock Tan, who has built one of the largest and most diversified companies in the industry. But in a rare announcement, the commission said last month it sent Broadcom a so-called statement of objections, highlighting potential reasons to block the deal unless sufficient remedies were forthcoming. It warned the transaction could lead to “higher prices, lower quality and less innovation” for business customers.