May 20, 2022

Daily Market Commentary

Canadian Headlines

• Prime Minister Justin Trudeau’s government joined Canada’s closest intelligence allies in banning Huawei Technologies Co. from fifth-generation wireless networks. The Chinese state-championed telecommunications firm poses a threat to Canada’s national security, Industry Minister Francois-Philippe Champagne said Thursday, confirming an earlier Bloomberg News report. ZTE Corp. equipment will also be prohibited. Firms that already have Huawei or ZTE gear installed will have to remove it by the end of 2027, Champagne’s department said in a statement. Trudeau’s government had delayed the decision for more than three years, as relations between Canada and China deteriorated, and a ban would almost certainly stoke tensions. The long-awaited announcement will be welcomed by President Joe Biden’s administration, which has sought to steer countries away from Huawei. American officials allege its gear could allow the Chinese government to interfere with 5G networks. Since 2019, the US has imposed what may be the strongest sanctions it has ever placed on a single company.

World Headlines

• European stocks gained on Friday, erasing their weekly decline, as dip buyers returned to hunt for bargains amid more appealing valuations.  The Stoxx Europe 600 Index was 1.6% higher by 11:32 a.m. in London, with almost all sectors rising. Automakers and travel and leisure stocks outperformed, while consumer stocks dropped, dragged lower by Richemont SA, which plunged after saying Chinese demand will be slower to recover than expected. European equities have had a volatile week as dip buyers returned following sharp drops fueled by worries of persistent high inflation and risks to economic growth from hawkish central banks. Surging prices are already affecting consumers and UK consumer confidence fell to its lowest level in at least 48 years.
• US equity futures pushed higher Friday along with stocks in Europe after China’s latest measure to bolster its economy injected a note of optimism at the end of another volatile week for global markets. Futures on the S&P 500 and Nasdaq 100 rose more than 1%, shrugging off modest losses on Wall Street on Thursday. Treasury yields edged higher, and the dollar was steady after its biggest one-day drop since 2020. Rebounds in risk sentiment have tended to fizzle this year. Investors continue to grapple with concerns about an economic downturn, in part as the Federal Reserve hikes interest rates to quell price pressures. Global shares are on course for an historic seventh week of declines.
• Oil headed for a modest weekly gain as optimism about the outlook for demand eclipsed concerns about tighter monetary policy and an economic slowdown that have combined to roil wider financial markets. West Texas Intermediate traded near $112 a barrel after closing higher on Thursday, and is up about 1% so far this week. It’s on course for a fourth consecutive weekly gain that would be the best run since mid-February.  Global fuel-product markets are tightening, especially in the US, where gasoline and diesel prices have risen to unprecedented levels in the run-up to summer driving season. Nationwide travel is expected to approach levels seen before the coronavirus pandemic, according to a forecast from auto club AAA.
• Gold headed for its first weekly gain in five weeks as rising concerns over economic growth and high inflation buoyed demand for the haven asset.  Bullion extended its weekly advance to 1.9% on Friday, aided by fragile risk sentiment that’s put global shares on course for a historic seventh week of declines. Higher-than-expected US jobless claims underlined the risks to economic growth as the Federal Reserve gears up for its most aggressive rate hiking cycle in decades. While higher rates make non-interest bearing gold less appealing, fears over a potential recession are providing some support. Holdings in bullion-backed exchange-traded funds ticked up Thursday from the lowest since March, according to initial data compiled by Bloomberg. A strengthening dollar has posed another headwind to the precious metal, although a gauge of the currency is down this week.
• Deere & Co., the largest maker of agricultural machinery, raised its fiscal-year outlook as high crop earnings fuel farmers’ appetites for new tractors. Disruptions related to the invasion of Ukraine helped elevate grain prices, boosting income of the farmers, who, in turn, invest in new equipment. The Moline, Illinois-based company forecast 2022 net income between $7 billion and $7.4 billion, up from a prior range of $6.7 billion to $7.1 billion, according to a statement on Friday. “Looking ahead, we believe demand for farm equipment will continue benefiting from positive fundamentals in spite of availability concerns and inflationary pressures affecting our customers’ input costs,” Chief Executive Officer John May said in the statement.
• President Joe Biden arrived in South Korea, where he’s set to visit a Samsung Electronics Co. semiconductor complex Friday as he seeks to bolster supply chains that reduce reliance on China. Biden’s first trip to Asia as president, which runs through Tuesday, also includes Japan. He’ll meet with regional leaders in a bid to firm up support for his plans to help Ukraine fend off Russia’s invasion and counter security threats posed by China and North Korea, which may conduct its first nuclear test since 2017 with Biden nearby.  Biden’s trip to the Samsung facility underscores the emphasis he’s placed on strengthening semiconductor alliances among the world’s largest chip making countries to try to ease shortages that have dragged on the global economy. The complex in Pyeongtaek, south of Seoul, houses the some of biggest chip production lines in the world and makes a wide range of products from memory chips to logic chips for Qualcomm Inc. and other companies.
• China’s coronavirus lockdowns mean its economic growth may undershoot the US for the first time since 1976, in a role reversal with potential political reverberations in both Beijing and Washington. The world’s second-largest economy will grow just 2% this year, Bloomberg Economics wrote in a report Thursday. By comparison, US gross domestic product will increase 2.8% this year, Bloomberg Economics predicts. While Beijing is applying fiscal, monetary and regulatory stimulus measures, the impact is being blunted by President Xi Jinping’s Covid Zero policy, which requires strict curbs on activity when virus outbreaks occur. The US, while struggling to cope with high inflation, is still being propelled by strong hiring and consumer spending.
• The late Nobel Prize-winning economist Paul Samuelson once quipped that Wall Street had predicted nine out of the last five recessions. This time, the stock market may be right. The US economy is starting to show signs of strain under the weight of decades-high inflation and climbing interest rates — raising the risk of a downturn.  Investors are taking note, with equities nosediving this week as earnings gloom at retailers like Walmart Inc. and Target Corp. fueledthe growing fears. And the trend could spell trouble for President Joe Biden, whose Democrats must defend thin Congressional majorities in November’s midterm vote.
• Tesla Inc. has lost its crown jewel status in Cathie Wood’s main fund for the first time in about four-and-a-half years. Elon Musk’s company had commanded the pole position by market value in the ARK Innovation ETF, an exchange-traded fund known as ARKK, on most days since at least 2017, according to data compiled by Bloomberg. That changed on Thursday, when electronics product maker Roku Inc., a firm with $13.2 billion of market value, pipped it to take the top spot. ARKK held Tesla shares worth about $703 million as of Thursday’s close, versus a position of $717 million in Roku, according to ARK Investment Management LLC.’s data compiled by Bloomberg.
• Investors fled every major asset class in the past week, with US equities and Treasuries a rare exception to the massive exodus, amid concerns that tightening monetary policy will push major economies into a recession. Equity funds had $5.2 billion outflows in the week to May 18, led by redemptions from mutual funds, according to Bank of America Corp.’s note citing EPFR Global data. Bond fund outflows reached $12.3 billion, with only Treasuries and government debt seeing additions. Investors also exited cash and gold. Global stocks have lost nearly $12 trillion in market value since their peak in March as investors fled risk assets amid a flurry of concerns spanning hawkish central banks and surging inflation. Although strategists ranging from David J. Kostin at Goldman Sachs Group Inc. to Marko Kolanovic at JPMorgan Chase & Co. have said fears of an imminent recession are overblown, strategists broadly agree that the equity market rout has further to go.
• The best may already be over for the almighty dollar as growing fears of a US recession bring down Treasury yields. The premium US government securities offer over their major peers has shrunk from a post-pandemic high set in April as inflation runs hotter than any other major economy outside the UK, damping demand for American assets. The greenback is also under pressure on concern Federal Reserve interest-rate hikes will tip the economy into a recession.  The usually positive correlation between the dollar and risk aversion may be breaking down due to the convergence of a slowing US economy and the rest of the global economy, as well as the convergence of hawkishness between the Fed and other Group-of-10 central banks, Credit Agricole strategists led by Valentin Marinov in London wrote in a research note.
• New and suspected cases of monkeypox have cropped up in New York City, Sweden, Canada and the two biggest cities in Australia in recent days, in signs that the rare and potentially deadly cousin of the smallpox virus traditionally confined to regions in Africa is now seeded across the globe.  Scientists are hunting for links between the scattered infections that have been emerging in the northern hemisphere for about two weeks now. The pathogen typically causes flu-like symptoms, followed by a rash that often starts on the face and spreads down the body. The illness often lasts for two weeks to a month. The virus doesn’t spread efficiently between people since direct contact with bodily fluids, infectious sores, contaminated material or large respiratory droplets is needed for transmission. But the danger of even rare occurrences is apparent in how widely the virus has now traveled, with some evidence of community spread and cases popping up in many corners of the world.
• China kept buying more energy from Russia, with purchases of oil, gas and coal jumping 75% in April to over $6 billion, even as domestic demand slowed due to a resurgent virus and the US and Europe moved away from purchases. Imports of Russian liquefied natural gas surged 80% from a year earlier to 463,000 tons, according to Chinese customs data on Friday. That’s despite China’s total imports of the super-chilled fuel dropping by more than a third as lockdowns and other restrictions on industrial activity choked demand.
• Air France-KLM is in talks with Apollo Global Management Inc. about a 500 million-euro ($528 million) capital injection that would help the carrier repay a chunk of the state aid that helped it survive the Covid crisis. The funding would see the U.S. private-equity firm provide capital to an Air France affiliate that owns a pool of spare jetliner engines used in the Paris-based carrier’s maintenance operations, according to a statement Friday. Air France-KLM has flagged plans for a 4 billion-euro capital increase as it seeks to repay debt in line with European Union requirements on state funding. The Apollo plan comes days after the company revealed that shipping giant CMA CGM SA aims to take a 9% stake as part of an air-cargo alliance.
• UK consumer confidence fell to its lowest level in at least 48 years after a surge in the cost-of-living left people more gloomy than at the depths of the 1970s energy crisis and during the recession more than a decade ago. The market researcher GfK said its closely-watched measure of sentiment fell 2 points to minus 40 this month, the least since records began in 1974. It’s another sign that the worst inflation in four decades is threatening the recovery from the pandemic. The figures add to pressure on Chancellor of the Exchequer Rishi Sunak to help those suffering the most. It also may give the Bank of England reason to move carefully in raising interest rates further.
• China is seeking to replenish its strategic crude stockpiles with cheap Russian oil, a sign Beijing is strengthening its energy ties with Moscow just as Europe works toward banning imports due to the war in Ukraine. Beijing is in discussions with Moscow to buy additional supplies, according to people with knowledge of the plan who asked not to be named as the matter is private. Crude would be used to fill China’s strategic petroleum reserves, and talks are being conducted at a government level with little direct involvement from oil companies, said one person.
• Finland is becoming the third European country to be cut off from Russian natural gas after refusing to pay for the fuel in rubles. Flows on a main pipeline from the region’s top supplier are set to stop in the early hours of Saturday, according to a filing by Finnish importer Gasum Oy. Poland and Bulgaria had their taps turned off last month for the same reason. The lost supplies will likely have a limited impact on the Nordic nation’s economy, with the fuel accounting for just about 5% of the energy mix. It’s mainly used by factories rather than for heating like in many other European nations.
• Foot Locker Inc. sees full-year sales and profit at the high end of its prior expectations, a sign the sneaker retailer is overcoming Nike Inc.’s move to sell via its own channels. The shares climbed in early trading. Earnings per share, excluding some items, for the fiscal year ending in late January are now expected to be at the upper end of the $4.25 to $4.60 forecast range, the company said in a statement Friday. Analysts surveyed by Bloomberg had projected $4.41, on average.
• Chinese banks cut a key interest rate for long-term loans by a record amount, a move that would reduce mortgage costs and may help counter weak loan demand caused by a property slump and Covid lockdowns. The five-year loan prime rate, a reference for home mortgages, was lowered to 4.45% from 4.6%, according to a statement by the People’s Bank of China Friday. That was the largest reduction since a revamp of the rate in 2019. A majority of economists surveyed by Bloomberg had predicted a cut by five to 10 basis points. The cut is a significant move to boost loan demand, as consumer and business confidence has been battered by Covid lockdowns and a downturn in the property sector that has seen a string of developer defaults and falling home prices. The lower rate will be applied to new mortgages immediately, while existing mortgages won’t be repriced until next year at the earliest.
• The Group of Seven industrialized nations will agree on more than 18 billion euros ($19 billion) in aid for Ukraine to guarantee the short-term finances of the government in Kyiv, according to German Finance Minister Christian Lindner. “We have to guarantee the capability of Ukraine to defend itself so we are here fundraising to secure the liquidity of the Ukrainian government,” Lindner said Friday in an interview with Bloomberg Television on the sidelines of a meeting of G-7 finance ministers near Bonn. “It appears that there will be more than 18 billion we can raise to support Ukraine in this crucial historical moment,” he added. The cash includes $7.5 billion committed by the US and money from the European Union, Lindner said, adding that “there shouldn’t be a concern of the Ukraine government to finance their state needs” in coming months.
• India is investigating three separate incidents in the past two months where airline pilots had to shut down plane engines mid-flight made by a joint venture of General Electric Co., according to people familiar with the matter.  The so-called commanded in-flight shutdowns — when pilots intentionally turn off one of the two engines after encountering problems — may have stemmed from different issues. Modern commercial jetliners are equipped to fly and land safely with a single engine. All three incidents, the people said, involved engines made by CFM, a joint venture between GE and France’s Safran SA. All the planes landed safely. The incidents involved two Airbus SE A320neo jets, operated by Air India Ltd., and a Boeing Co. 737 Max aircraft, operated by Indian carrier SpiceJet Ltd., according to the people.
• The spiraling cost of issuing new debt may force some firms to abandon years of market convention and hang on to junior bonds they’d normally retire at the first opportunity. Subordinated corporate bonds, or ‘hybrids’ because they have characteristics of debt and equity, offer beefier yields to compensate for the risk of coupon deferrals or extensions beyond the first call date. The latter has typically been a non-issue for investors, especially as skipping the first call means some lose their equity treatment — a feature that helps the issuer to support its credit rating. But now, the extra cost of selling new hybrid and normal debt-only bonds is complicating what used to be a straightforward decision. Spreads have jumped and average yields on hybrid bonds have reached 3.8% from 1.6% at the start of the year, based on ICE Bank of America indexes.

*All sources from Bloomberg unless otherwise specified