May 2, 2023

Daily Market Commentary

Canadian Headlines

  • Asset manager CI Financial Corp. was cut to junk by S&P Global Ratings before the credit firm withdrew its ratings at the company’s request. The downgrade reflected S&P’s expectation that CI will operate with debt of four to five times earnings before interest, taxes, depreciation and amortization over the next year, S&P said in a statement Monday. S&P lowered its issuer credit and senior unsecured debt ratings from BBB- to BB+ “following CI Financial Corp.’s request to withdraw our ratings,” according to the statement. The agency then dropped coverage. The fund manager’s borrowing, built up as it went on an acquisition spree of US registered investment advisory firms, has become a concern for analysts and investors.

World Headlines

  • European equities dropped on a busy day for earnings reports and economic data while investors braced for crucial central bank decisions due later this week. The Stoxx Europe 600 declined 0.3% by 10:21 a.m. in London. Banks and technology outperformed, while energy and real estate lagged. Among individual movers, BP Plc fell after it slowed the pace of share buybacks as it reported a smaller-than-expected drop in first-quarter profit due to a strong performance in oil and gas trading. HSBC Holdings Plc rallied after it said it will buy back as much as $2 billion of stock following first-quarter results that beat estimates. Electrolux AB climbed on news the Swedish luxury home appliance maker has drawn a takeover approach from China’s Midea Group Co. Meanwhile, underlying inflation in the euro area eased for the first time in 10 months, backing the case for the European Central Bank to slow the most aggressive interest-rate hiking campaign in its history later this week.
  • US stock futures slipped, while Treasuries edged higher as investors braced for the Federal Reserve’s policy decision and awaited developments from Washington on the debt limit showdown. Contracts on the S&P 500 swung between gains and losses overnight after ending Monday little changed. The rescue of First Republic Bank drew a line for now under US banking turbulence, but investors fear lending will be crimped, slowing an economy already under pressure from the most aggressive rate-hike campaign in decades. Attention will turn to the Fed, whose two-day policy meeting kicks off Tuesday. The central bank is expected to raise rates by a quarter percentage point and potentially signal a willingness to hold off on further increases. Focus is also on policymakers in Washington after Treasury Secretary Janet Yellen said the government might run out of money to pay its bills as early as June.
  • Asian stocks were little changed, with investors digesting a slew of economic data from China for clues on the strength of the nation’s recovery, as most of the region’s markets resumed trading after a holiday. The MSCI Asia Pacific Index swung in a narrow range, with declines in industrials and consumer staples moderating gains in utilities stocks. Hong Kong equities also fluctuated, while key gauges rose in South Korea and were mixed in Japan. Australian stocks fell after the country’s central bank unexpectedly raised interest rates by a quarter-percentage point and signaled further policy tightening ahead. The Hang Seng China Enterprises Index wiped out an early gain of 2.1% as traders assessed China’s shrinking manufacturing activity. The official manufacturing purchasing managers’ index unexpectedly fell to 49.2 in April from 51.9 in March. Mainland markets are shut through Wednesday.
  • Oil prices slid as concerns over short-term demand, including weaker-than-expected Chinese manufacturing data, outweighed expectations for tight supply later in the year. West Texas Intermediate fell 0.5% toward $75 a barrel after a 1.5% drop on Monday. China’s export-tilted manufacturing sector missed estimates in April in a possible indication of recession in buyer markets such as the US and Europe. Still, the bank sees oil’s supply and demand balance shifting from surplus in April to a 1.3 million barrel-a-day deficit in June, with Chinese usage expected to grow and production cuts taking units out of the market.
  • Underlying inflation in the euro area eased for the first time in 10 months, backing the case for the European Central Bank to slow the most aggressive interest-rate hiking campaign in its history later this week. Consumer prices stripping out volatile items like fuel and food costs rose 5.6% from a year ago in April — down from March’s record 5.7% advance and in line with the median estimate in a Bloomberg poll of economists. Headline inflation, meanwhile, ticked up to 7% — a touch more than the 6.9% analysts anticipated and still far above the 2% target. Services prices and a less favorable annual comparison for energy costs than in March drove the acceleration.
  • Morgan Stanley is preparing a fresh round of job cuts amid a renewed focus on expenses as recession fears delay a rebound in dealmaking. Senior managers are discussing plans to eliminate about 3,000 jobs from the global workforce by the end of this quarter, according to people with knowledge of the matter. That would amount to roughly 5% of staff excluding financial advisers and personnel supporting them within the wealth management division. The banking and trading group is expected to shoulder many of the reductions, one of the people said. A spokesperson for New York-based Morgan Stanley, which employs about 82,000 people, declined to comment.
  • Hundreds more Credit Suisse Group AG bondholders sued Switzerland’s banking regulator after their securities valued at about $1.7 billion were wiped out during the lender’s government-brokered takeover by UBS Group AG. Law firm Pallas Partners, which filed the suit in a Swiss court on April 18, said the Finma agency had no right to order the writedown and is seeking full compensation for its clients — 90 institutional investors and asset managers with $1.35 billion in so-called additional tier-1 bonds, as well as 700 retail and family office clients accounting for some $300 million. The latest claims mean that investors representing more than a third of the $17 billion in AT1 bonds issued by Credit Suisse have now sought to get their money back. US law firm Quinn Emmanuel last month filed a claim in Swiss court representing more than 400 institutional investors who held about $4.5 billion worth of AT1s, and at least two other complaints have been filed.
  • HSBC Holdings Plc’s shares rose after the Asia-focused lender announced a fresh plan to return money to shareholders after reporting first-quarter results that beat estimates. The London-headquartered bank will buy back as much as $2 billion of stock and also resume paying quarterly dividends for the first time since 2019, stepping up capital returns as it faces mounting pressure from one of its largest investors to boost profitability. Pretax profit tripled to $12.89 billion, beating an estimate of $8.64 billion. That was partially driven by a $2.1 billion reversal of an impairment linked to the delayed sale of its French retail arm and the booking of a $1.5 billion gain from its purchase of Silicon Valley Bank’s UK business.
  • Writers for some of the most popular shows on television are walking off the job, striking for higher pay amid rapid changes in the way people watch their programs and films. The Writers Guild of America, which represents more than 11,500 Hollywood scribes, said its strike is effective Tuesday morning Los Angeles time. Members voted overwhelmingly to authorize the walkout last month. As a result, work on late night talk shows — such as Jimmy Kimmel Live and The Tonight Show with Jimmy Fallon — and soap operas could halt immediately. Depending on how long the work stoppage lasts, consumers could miss episodes of their favorite shows this fall. Movie release schedules could be impacted. The walkout could also depress the economy of Los Angeles, the nation’s second-largest city, which is already struggling with slower home sales and labor disruptions at its port.
  • Tesla Inc. has slightly raised prices of its Model 3 sedan and Model Y sports utility vehicle in the US and China, as the electric vehicle pioneer continues to tweak its pricing policy. The price of the Model 3 in China rose to 231,900 yuan ($33,520) from 229,900 yuan, while the performance edition also saw its price go up by 2,000 yuan, according to the company’s website. The Model Y now starts at 263,900 yuan, with the price of the long-range and performance editions also going rising by 2,000 yuan.
  • A top US regulator wants a sweeping overhaul of deposit insurance after recent bank failures partly drained a pool of money the government uses to protect lenders’ clients. The Federal Deposit Insurance Corp. on Monday laid out three options for the bedrock fund, which currently covers up to $250,000 on most accounts. The regulator highlighted the impact of technological changes and high concentrations of uninsured depositors in pockets of the banking system as reasons for a possible overhaul. The FDIC said in its report that switching to a “targeted coverage” approach, where business accounts get more coverage than the current cap, would be the best option for financial stability. Such a change, however, would require congressional action. Other options include maintaining coverage as is, or switching to cover all deposits, the FDIC said.
  • Emirates will look to place orders for more aircraft in the next few months as demand for long-haul travel rebounds and the carrier looks to lock in delivery slots. “We will probably order more in the next few months on top of what we already have,” Emirates President Tim Clark said in an interview with Bloomberg TV. Clark declined to comment on the details of the order, including which manufacturer he was speaking to, or the size of the order.  Emirates has large backlogs for the upcoming Boeing Co. 777X, that it plans to bring into service from summer 2025, as well as the Airbus SE A350 model, with deliveries from August next year. Clark said Emirates is extending the life of its existing A380 super jumbo and 777 fleets due to long lead times for aircraft deliveries.
  • BP Plc has paid about $1 billion in UK windfall taxes on profits from its North Sea operations since the levy was introduced less than a year ago. Disclosure of the payout, which is used to help British consumers cope with high energy prices, did little to deflect the ire of politicians who once again criticized the extraordinary profits as households suffer a cost-of-living crisis. Ed Miliband, who oversees climate policy for the opposition Labour Party, decried the earnings as “windfalls of war.”  UK Prime Minister Rishi Sunak introduced temporary higher taxes on North Sea oil and gas producers under the Energy Profits Levy in May last year, when he was Chancellor of the Exchequer, to counteract soaring prices. He has since extended the measure.
  • President Joe Biden invited top congressional leaders for a May 9 meeting on the debt limit as the US barrels closer to a potential default that the Treasury Department warned Monday could come sooner than anticipated. The proposed meeting is the first sign of progress in what has become a high-stakes game of chicken in Washington, with nothing short of the full faith and credit of the US hanging in the balance. The White House has said it would not negotiate with Republicans over extending the debt ceiling, while House Speaker Kevin McCarthy has vowed not to extend the limit without corresponding cuts to the federal budget. McCarthy agreed to attend the May 9 meeting after a speaking with Biden, a GOP aide said Tuesday. Senate Minority Leader Mitch McConnell has yet to confirm his plans. A White House official emphasized that the invitation shouldn’t be interpreted as Biden relenting from his refusal to negotiate over the debt ceiling.
  • Uber Technologies Inc. reported earnings that beat analysts’ estimates, showing that consumers continue to spend more on rides and food takeout despite an uncertain economic outlook and rising prices.  Adjusted earnings before interest, taxes, depreciation and amortization reached $761 million in the first quarter, the company said in a statement Tuesday. That beat the $678.6 million analysts were predicting, according to data compiled by Bloomberg. The results signal that the San Francisco-based company is weathering a shaky economy better than expected, even as spending in retail and other areas suffers. It’s also been outshining rival Lyft Inc., which is overhauling operations in the face of sluggish demand and weak profits. Lyft is set to report its results later this week.
  • Samsung Electronics Co. is banning employee use of popular generative AI tools like ChatGPT after discovering staff uploaded sensitive code to the platform, dealing a setback to the spread of such technology in the workplace. The Suwon, South Korea-based company notified staff at one of its biggest divisions on Monday about the new policy via a memo reviewed by Bloomberg News. The company is concerned that data transmitted to such artificial intelligence platforms including Google Bard and Bing is stored on external servers, making it difficult to retrieve and delete, and could end up being disclosed to other users, according to the document. The company conducted a survey last month about the use of AI tools internally and said that 65% of respondents believe that such services pose a security risk. Earlier in April, Samsung engineers accidentally leaked internal source code by uploading it to ChatGPT, according to the memo. It’s unclear what the information encompassed