May 2, 2022

Daily Market Commentary

Canadian Headlines

  • A real estate company with apartment buildings in five U.S. states is set to list in Toronto, ending a deep freeze in Canada’s market for initial public offerings. Dream Residential Real Estate Investment Trust expects to close its $125 million offering and begin trading on May 6, according to a statement. The REIT will be partially managed by a unit of Dream Unlimited Corp., the property group of Toronto real estate magnate Michael Cooper.  It’s the first corporate IPO of more than C$150 million to be completed on a Canadian exchange this year. Last year, there were 17 deals of at least that size in Canada, excluding closed-end funds, with two raising over C$1 billion, according to Bloomberg data.

World Headlines

  • European equities fell on Monday, as disappointing figures about economic activity in China and the prospect of sanctions targeting Russian oil weighed heavily on risk appetite in the first session of the month. The Stoxx 600 Europe Index was down 1% as of 11:34 a.m. in Paris, after abruptly extending its losses within the space of a few minutes, and briefly sinking by as much as 3%. With U.K. closed for a holiday and trading volume thin, Nordic equities led the sharp downward moves. The OMX Stockholm 30 Index fell as much as 8% before paring losses. “Nasdaq has noted this major downturn, and we are currently looking into it with our Market Monitoring team,” a spokesman for Nasdaq Stockholm said.
  • Stocks were mixed Monday and the dollar gained as worries over high inflation, tightening monetary policy and China’s Covid lockdowns contributed to investor caution.  U.S. futures rose modestly after slumping in April, the worst month since the pandemic roiled markets more than two years ago.  Treasuries advanced after tumbling on Friday and a dollar gauge was around the highest level since 2020 as investors prepare for a week that’s likely to see a global round of central bank tightening. Dip buyers waded into U.S. markets after Friday’s bruising selloff. Apple Inc., Microsoft Corp and Tesla Inc. advanced in premarket trading. Activision Blizzard Inc. climbed after Warren Buffett snapped up more of the stock in a merger arbitrage bet.
  • Asian stocks slid after underwhelming earnings guidance from U.S. tech giants fueled worries about a further slowdown in a global economy already smarting from the Federal Reserve’s policy tightening and China’s lockdowns to curb the coronavirus. The MSCI Asia Pacific Index dropped as much as 0.8%, weighed down by losses in financials and technology. The key gauge in Australia fell the most ahead of Tuesday’s local central bank policy meeting that is expected to raise rates for the first time since 2010. Markets in China, Hong Kong, Taiwan and Singapore were closed for holidays. Chinese economic activity contracted sharply in April, data released Saturday showed, weighing on regional investor sentiment even after the Politburo pledged to meet economic targets. Fed Chair Jerome Powell has as good as promised that U.S. officials will deliver a 50 basis-point interest-rate increase this week.
  • Oil declined in tandem with equities as China’s stringent measures to curb Covid-19 threatened a further hit to economic activity and fuel demand.  West Texas Intermediate futures slid 3% as data showing a sharp economic contraction in the world’s top oil importer outweighed growing expectations that Europe may agree to curb crude purchases from Russia. Beijing is set to close gyms and cinemas over the Labor holiday that lasts through Wednesday, and Shanghai will keep virus measures in place. Oil climbed for a fifth month in April, marking the longest monthly winning streak since January 2018. Russia’s invasion of Ukraine has spurred inflation, and led the U.S. and its allies last month to agree on a coordinated release of strategic crude reserves to ease surging energy prices. The war has also sparked a rally in diesel prices in the U.S.
  • Gold declined following its first monthly loss since January as the dollar extended a rally and investors weighed expectations for the U.S. Federal Reserve to aggressively tighten monetary policy. Bullion fell as much as 1.1% in thin trading, with the U.K. closed for a holiday. Traders are awaiting this week’s Federal Open Market Committee meeting after Fed Chair Jerome Powell potentially endorsed two or more 0.5 percentage-point hikes to tame inflation. That could weigh on demand for non-interest bearing gold. Spot gold fell 0.9% to $1,879.68 an ounce at 10:48 a.m. in London, after dropping 2.1% last month. The Bloomberg Dollar Spot Index rose 0.1%, after reaching the highest since May 2020 last Thursday. Silver and palladium declined, while platinum was little changed.
  • China’s stringent lockdowns to curb Covid-19 infections are taking a significant toll on the economy and roiling global supply chains, with President Xi Jinping under pressure to deliver on pledges to support growth. The damage from shutdowns in April in major financial hub Shanghai, auto manufacturing center Changchun and elsewhere was laid bare by the first official data for the month released over the weekend.  Both manufacturing and services activity plunged to their worst levels since February 2020, when the nation imposed a range of restrictions amid its initial coronavirus outbreak centered in Wuhan, according to purchasing managers surveys. The offshore yuan weakened in the wake of the data.
  • The historic rout in Inc.’s shares last week highlights how difficult the environment has become for e-commerce stocks after their pandemic-driven boom, with investors set for another rollercoaster in coming days. Etsy Inc., Wayfair Inc. and Shopify Inc. are hurtling toward earnings reports this week in the shadow of Amazon’s worst selloff since 2006. The tech giant triggered the rout with a weaker-than-expected revenue forecast, adding to evidence of slowing e-commerce growth. The blazing rally e-commerce stocks saw at the height of Covid-19 lockdowns in 2020 has reversed as consumers returned to their pre-pandemic habits and inflation cooled their spending. Amazon executives said they were watching for whether shoppers will trim their purchases to offset rising prices as fuel and labor costs bite.
  • Investors withdrew money from exchange-traded funds that buy emerging market stocks and bonds last week. This was the third straight week of outflows. Outflows from U.S.-listed emerging market ETFs that invest across developing nations as well as those that target specific countries totaled $23.1 million in the week ended April 29, compared with losses of $225.8 million in the previous week, according to data compiled by Bloomberg. So far this year, inflows have totalled $19.1 billion.
  • As war broke out in Europe and U.S. inflation soared, Berkshire Hathaway Inc.’s Warren Buffett was doubling down on a tried-and-trusted strategy to navigate the fallout. The billionaire investor went on his biggest stock buying spree for at least a decade, undeterred by the geopolitical turmoil and fears of runaway inflation. He and his deputies dug deeper into the U.S. stock market and expanded the conglomerate’s stakes in Chevron Corp. and Activision Blizzard Inc., even as Buffett noted the “extraordinary” price increases in Berkshire’s businesses. Buffett, who held court in Omaha, Nebraska, on Saturday at Berkshire’s annual shareholder meeting, had faced questions about why he didn’t take advantage of the downturn when the pandemic took hold. Now, as war and inflation fuel market volatility prompting the S&P 500 Index’s worst quarter in two years, he’s ramped up amid the uncertainty, making $41 billion in net stock purchases in the first quarter. That’s the most in data going back to 2008.
  • In times of Treasury turmoil, the biggest investor outside American soil has historically lent a helping hand. Not this time round.  Japanese institutional managers — known for their legendary U.S. debt buying sprees in recent decades — are now fueling the great bond selloff just as the Federal Reserve pares its $9 trillion balance sheet. The latest data from BMO Capital Markets show the largest overseas holder of Treasuries has offloaded almost $60 billion over the past three months. While that may be small change relative to the Japan’s $1.3 trillion stockpile, the divestment threatens to grow.  That’s because the monetary path between the U.S. and the Asian nation is diverging ever more, the yen is plumbing 20-year lows and market volatility stateside is breaking out. All that is ramping up currency-hedging costs and completely offsetting the appeal of higher nominal U.S. yields, especially among large life insurers.
  • German Chancellor Olaf Scholz plans to invite Indian Prime Minister Narendra Modi as special guest to a Group of Seven leaders’ summit next month as part of an effort to forge a broader international alliance against Russia. Germany, which currently holds the rotating G-7 presidency, will also welcome the leaders of Indonesia, South Africa and Senegal to the gathering in the Bavarian Alps June 26 to June 28, Scholz’s spokesman, Steffen Hebestreit, said Monday at a regular news conference in Berlin, confirming a Bloomberg report published Sunday. The German leader is hosting Modi for talks in Berlin later on Monday and there will also be a joint German-Indian cabinet meeting. Despite concerns over the prime minister’s reluctance to condemn Russia’s invasion of Ukraine and a recent jump in India’s fossil-fuel imports from Russia, Scholz decided the G-7 should court India, according to people familiar with the matter.
  • Ukraine’s central bank warned that its financial lifeline to the government has its limits and urged the finance ministry in Kyiv to lean on outside help in efforts to shore up the economy as Russia presses forward with the invasion.  The monetary authority, which began direct purchases of Ukrainian government bonds after the war began in late February, added 50 billion hryvnia ($1.65 billion) to its debt portfolio in April, bringing the tally to 70 billion hryvnia. The central bank financing is the third-biggest source of funds behind war-bond proceeds and International Monetary Fund assistance.  The Ukrainian economy has been ravaged by the Russian military invasion, with critical sectors such as agriculture disrupted by occupying forces and exports being cut off. Nikolaychuk has said the government needs to fill a budget gap of as much as $7 billion a month because of the war.
  • Volkswagen AG will maintain the ability of its power plants at is headquarters in Germany to burn both coal and gas as the threat of gas rationing hangs over the country, CEO Herbert Diess tells a town hall of Wolfsburg residents.  VW has been modernizing two major power plants owned and operated by the company in Wolfsburg to switch from coal to gas to cut CO2 emissions.
  • Finland’s Fennovoima Oy dropped a contract with a Russian energy company for the delivery of a nuclear power plant under construction in the Nordic country. The deal with a unit of Rosatom Corp. ends immediately, Fennovoima said in a statement on Monday, citing “significant and growing delays during the last years” and the company’s inability to mitigate the project’s growing risks as a result of Russia’s war. The decision removes a conundrum for Finnish policy makers who had been looking for a legal way to prevent Russia from operating the country’s critical infrastructure. Economy Minister Mika Lintila had already said he wouldn’t propose a construction permit for the unit.
  • A sudden selloff in European stock markets just before 10 a.m. CET on Monday was fueled by a flash crash in the Nordic region, with traders and fund managers pointing toward a potential portfolio trade error. The OMX Stockholm 30 Index slumped as much as 8% in just five minutes before recovering most of the losses shortly after. The index was trading 1.1% lower as of 1:00 p.m. CET, roughly in line with a dip in broader markets. While it was not immediately clear what caused the short-lived slump, a spokesman for Nasdaq Stockholm said it wasn’t a technical glitch on their part. “Our first priority was to exclude technical issues in our systems, and our second priority was to exclude an external attack on our systems. We have now excluded both,” David Augustsson, spokesman for Nasdaq Stockholm, said.
  • Apple Inc. was hit by a formal antitrust complaint from the European Union for restricting access to technology and services that allow users to make payments direct from their iphones. The European Commission said Monday it sent a so-called statement of objections alleging how the tech giant abuses its dominance over mobile wallets on its devices via its Apple Pay service. If confirmed, the company could face hefty fines under EU antitrust rules. “We have indications that Apple restricted third-party access to key technology necessary to develop rival mobile wallet solutions on Apple’s devices,” EU antitrust chief Margrethe Vestager said in a statement. The EU’s charge sheet makes a preliminary finding that the company “may have restricted competition, to the benefit of its own solution.”
  • A new wave of oil platforms is sweeping into the U.S. Gulf of Mexico as crude prices are riding historic levels and demand for barrels is higher than ever. But don’t count on the new production to close the oil-supply gap that has plagued the world’s economies since the pandemic. Even with the new platforms coming online, Gulf oil production won’t grow substantially in the coming years as mature fields decline, according to analysts. BP Plc’s Argos and Shell Plc’s Vito — floating production platforms that are taller than 20-story buildings and have decks the size of football fields — will start pumping crude off the Louisiana shore later this year. They will join Murphy Oil Corp.’s King Quay, a behemoth that started producing oil in April, also off the Louisiana coast. Others from Chevron Corp., Shell and Beacon Offshore Energy are expected to start production in two years. Once all six platforms are online, they could produce up to 560,000 barrels a day.
  • As they prepare for the next round of global climate talks in November, officials from rich countries are trying to pull together a series of multibillion-dollar packages to help poor countries phase out coal. But negotiations have been snarled by national politics and Russia’s war in Ukraine, which has made the dirtiest fossil fuel a lucrative commodity to mine and export, according to people familiar with the talks who asked not to be identified because the discussions are private. The talks stem from a landmark $8.5 billion pledge by the U.K., U.S. and European Union before last year’s COP26 summit to support South Africa’s move away from fossil fuels. The deal has become a model for decarbonizing other nations including India, Indonesia and Vietnam. The hope is that agreements can be reached with those countries before COP27, the people said, and that details of the South Africa pact will be finalized by then.
  • PayPal Holdings Inc. formed a partnership with Aon Plc to offer its small-business customers the ability to shop for and manage their insurance policies using the company’s digital-commerce platform. The collaboration between the San Jose, California-based payments firm and the Dublin-based insurance broker will integrate Aon’s CoverWallet small-business insurance product into PayPal’s digital offering, the companies said in a statement Monday. Insurance brokers have been taking steps to expand their reach online. In March, Hub International Ltd. partnered with Bold Penguin Inc. to acquire the assets of a digital brokerage that targets small businesses.

“I failed my way to success.” -Thomas Edison

*All sources from Bloomberg unless otherwise specified