May 19, 2023

Daily Market Commentary

Canadian Headlines

  • Canada’s second-largest airline, WestJet Group, reached tentative agreement Friday morning with its pilots on pay, job security and scheduling, averting a strike that would have grounded its flights ahead of a holiday weekend in Canada that kicks off the country’s summer-travel season. Roughly 1,800 pilots were set to go on strike Friday, but the Calgary, Alberta-based airline said early Friday that it had come to an agreement with the union representing pilots, the Air Line Pilots Association, or ALPA. Details of the deal weren’t immediately available. “The WestJet Group is pleased to have reached a tentative agreement that is industry-leading within Canada and recognizes the important contributions of our valued pilots by providing meaningful improvements to job security and scope, working conditions and wages,” said WestJet Chief Executive Alexis von Hoensbroech. The agreement includes pilots at WestJet’s ultralow-fare subsidiary, Swoop.

World Headlines

  • European stocks rallied on Friday following gains on Wall Street as optimism kicked in from progress in US debt-celling negotiations. The Stoxx Europe 600 Index was up 0.7% as of 10 a.m. in London. Almost all sectors rose, with tech stocks among the best performers after the Nasdaq 100 gained nearly 2% on Thursday. A 0.7% advance in the DAX Index put the German benchmark on course for its highest-ever close after the previous record set on Jan. 5, 2022. Equities in Europe have been trading in a tight range after a recovery from the March banking-lead rout faltered. A strong earnings season hasn’t translated into gains for markets as investors are waiting for a final agreement on the US debt-limit deal.
  • Chinese stocks were the outlier to Friday’s risk-on mood. The Hang Seng Tech Index slumped as much as 2.4% as Alibaba Group Holding Ltd dropped in the wake of disappointing sales. China’s yuan recovered from an earlier loss after the central bank vowed to curb speculation in the yuan and called for more stability in the foreign exchange market. The offshore yuan extended a rise after the PBOC statement, gaining 0.5% to 7.0136 per dollar, after breaching the closely-watched 7 per dollar level.
  • Oil headed for its first weekly advance in more than a month on optimism that the US will reach an agreement to raise its debt ceiling and avert a catastrophic default. West Texas Intermediate futures climbed above $72 a barrel, bringing this week’s gain to about 3%. House Speaker Kevin McCarthy said negotiators may reach an agreement in principle as soon as this weekend. Asian refiners are snapping up US oil cargoes again, and forecasters continue to predict global crude markets will tighten this summer. Crude is still down 10% this year as China’s lackluster economic recovery and monetary tightening by the Federal Reserve weigh on the outlook. Fed officials injected some uncertainty into the market this week, sounding increasingly split on whether to raise interest rates at their meeting next month or pause.
  • Gold headed for the biggest weekly slump since February as progress toward a resolution of the US debt-ceiling dispute eroded demand for the haven. Bullion edged higher on Friday after dropping in the previous session when House Speaker Kevin McCarthy said that negotiators on the federal debt limit may reach an agreement in principle as soon as this weekend. The prospect of a damaging US default has underpinned gold since it surged to within touching distance of a record earlier this month. Spot gold rose 0.4% to $1,965.20 at 9:06 a.m. in London, but remained on track for a weekly drop of 2.3%. The Bloomberg Dollar Spot Index fell 0.1%. Silver and platinum gained, while palladium was steady.
  • Copper advanced, erasing this week’s losses, as hopes for a resolution to the US debt-ceiling standoff boosted risk assets. The metal rose as much as 1.6% to $8,300 a ton, the top of its current trading range. The possibility of a US default has weighed on the metal, though concerns have eased after House Speaker Kevin McCarthy predicted a deal in principle being reached this weekend. While demand languishes, the nation’s refined copper output, the world’s largest, posted a fresh record last month as smelters continued to ramp up capacity against a backdrop of elevated refining margins.
  • President Joe Biden urged his negotiators to keep pursuing a debt-limit deal after House Speaker Kevin McCarthy indicated that both sides may reach agreement as soon as this weekend to avoid a catastrophic US default. In a call early Friday from Japan, where he’s attending the Group of Seven summit, Biden told his hand-picked negotiating team in Washington that he’s confident Congress will act in time, according to a White House official. During the roughly 20-minute call, negotiators told Biden they were making steady progress, the official said, speaking on condition of anonymity to describe a private conversation. That reflected the optimistic takes offered hours earlier by McCarthy and Senate Majority Leader Chuck Schumer, who are making plans for votes in the coming days on a possible bipartisan deal.
  • Deere & Co. raised its full-year profit forecast amid strong demand for farm equipment and the easing of supply chain woes that have dogged companies since the pandemic. The US tractor maker lifted its outlook as it reported second-quarter profit that beat analyst estimates, citing healthy demand for farm and construction equipment and an improved operating environment. The company now expects earnings of $9.25 billion to $9.5 billion for the fiscal year that ends Oct. 31. The shares jumped as much as 6.6% in premarket trading. Moline, Illinois-based Deere is a bellwether for the health of the agricultural industry given its position as the world’s largest producer of farm machinery. Surging prices for corn, wheat and soybeans over the past two to three years have boosted agricultural incomes and helped farmers replace aging equipment, from tractors to combines. The company has also been able to partially offset recent supply chain pressures with price hikes.
  • A delegation of Tesla Inc. executives to India discussed the possible local sourcing of components and incentives but stopped short of proposing to build vehicles in the country, people familiar with the matter said, after the electric carmaker reopened dialog with the government after a year-long impasse.  While the automaker will eventually look to establish a domestic factory to tap India’s vast consumer market, it hasn’t yet presented a formal plan, the people said, asking not to be identified because the matter is private. The executives reiterated their concern about India’s high tariffs on imported cars during this week’s meeting, but the government doesn’t plan to change its tax regime to accommodate one automaker, one of the people said. Tesla didn’t immediately respond to an email seeking comment outside of normal US hours. A representative for the ministry of road transport and highways also didn’t immediately respond to a request for comment.
  • Group of Seven countries agreed to work together to track Russian diamonds, but stopped short of slapping Moscow with an outright ban on the lucrative gem trade. Leaders in a statement released Friday at their summit in Hiroshima, Japan, pledged to work together to “restrict trade in and use of diamonds mined, processed or produced in Russia” and coordinate future “restrictive measures, including through tracing technologies.”  The move to track and trace Russian diamonds across borders could pave the way for an import ban in the future, according to people familiar with the discussions at the summit. Bloomberg News reported earlier Friday on the plan to set up a tracking mechanism for the precious stones.
  • Farfetch Ltd shares jumped as much as 21% in pre-market trading following financial results that beat Wall Street’s expectations, a sign that luxury retail could still be a port in the storm amid a slowdown in discretionary shopping. Gross merchandise volume — the total dollar amount of processed orders — climbed to $931.7 million in the first quarter, Farfetch said Thursday, far exceeding the average analyst estimate of $904.9 million. The company also reported smaller losses than expectations. After sequentially growing sales volumes in both the US and China, the company believes it is on track to deliver growth ahead of the luxury market at large, Chief Financial Officer Elliot Jordan said in a statement.
  • European natural gas rose from a 23-month low near €30 in a sign that traders see that level as a floor for prices for now, with demand remaining stubbornly low. Benchmark futures climbed as much as 3.4% after slumping to the lowest since June 2021 on Thursday. Prices are still heading for a seventh straight week of declines, the longest streak in six years, driven by stable supply, mild weather and stronger renewable power generation. The gain on Friday shows that there may be room for a push higher when summer temperatures boost demand for cooling. Sunnier and warmer weather is expected over most of Germany this weekend, while below-average temperatures are forecast across Spain, meteorologist Maxar Technologies Inc. said. Last summer, Europe faced abnormal heat and drought that affected hydro power and some nuclear plants, bolstering the use of gas.
  • JPMorgan Chase and Co. is expanding its algorithmic-trading offering to US Treasury investors, betting that computer-powered strategies can make further headway in the world’s most important bond market. Execution algos assess prices in various venues to decide how and when to trade, often by splitting up a large transaction into smaller chunks. At banks like JPMorgan, they also look to make use of the dealer’s internal flow before going out to the broader market. But such products have yet to infiltrate rates to the same degree as other asset classes like foreign-exchange, said Chi Nzelu, the firm’s head of fixed income, currency and commodities eTrading. That’s changing amid a proliferation of Treasuries trading platforms in recent years, which has encouraged younger algorithmic challengers to try to disrupt established players in the $23 trillion market.
  • Foot Locker Inc. added more evidence that US consumers are pulling back on spending by cutting its annual sales forecast. The shoe retailer, which had already been struggling, said revenue this year would decline as much as 8%. It previously said the drop might be as much as 5.5%. That move came after sales sank 11% last quarter. The company’s revenue has “softened meaningfully given the tough macroeconomic backdrop,” Chief Executive Officer Mary Dillon said in the earnings statement. That caused the company to reduce its guidance amid more “aggressive markdowns.”
  • China’s yuan jumped on Friday after the country’s central bank moved to shore up the currency after a recent selloff, vowing to curb speculation and calling for more stability in the foreign exchange market. The People’s Bank of China and the foreign exchange regulator will “strengthen market expectation guidance and take actions to correct pro-cyclical and one-way market behaviors when necessary,” according to a statement Friday.  In offshore trade, the yuan gained 0.5% to 7.0121 per dollar and pulled away from 7.0750, its weakest level since December.
  • Ukrainian President Volodymyr Zelenskiy is attending a summit of Arab leaders in Saudi Arabia on Friday, which includes leaders either neutral toward Russia’s invasion of Ukraine or outwardly supportive of President Vladimir Putin. He will address the gathering and meet Saudi Crown Prince Mohammed bin Salman, according to a post on Telegram. Zelenskiy arrived in Jeddah aboard a French plane that took off from Poland, according to Saudi-owned Al Arabiya TV. It’s Zelenskiy’s first visit to the Persian Gulf since the start of the war in February 2022, and is a stop off on his way to the Group of Seven meeting in Japan.
  • Alibaba Group Holding Ltd.’s surprise move to fully spin out a potentially transformative $12 billion cloud business is stirring speculation about whether the Chinese e-commerce leader bowed to market or political realities. Chief Executive Officer Daniel Zhang dropped a bombshell Thursday when he unveiled the contours of Alibaba’s historic six-way shakeup for the first time. Included among the listing and financing of a plethora of businesses was a plan to fully relinquish control of the business known as Alibaba Cloud, a once-thriving operation that harbored the potential to supercharge the company the way Amazon Web Services grew to signify Inc. At the heart of the issue is why Alibaba chose to sever a business some analysts value at upwards of $30 billion, a prime beneficiary of a post-ChatGPT upswell that depends on cloud resources to train next-generation AI models. In doing so, it’s hiving off a unit that comes with historical baggage and its own share of business uncertainty. Alibaba dived as much as 5.9% in Hong Kong Friday, after also reporting disappointing Chinese commerce figures.