May 20, 2022

Daily Market Commentary

Canadian Headlines

  • Fortis Inc. plans to increase its presence in the green bond market via transactions from subsidiaries as the C$58 billion ($45 billion) asset company moves to reduce its greenhouse gas emissions, Chief Financial Officer Jocelyn Perry said. The St. John’s, Newfoundland-based power utility, which operates in nine US states, five Canadian provinces and three Caribbean countries, is deploying a C$20 billion capital program over 2022 to 2026. That includes environmental goals such as connecting more renewable power generation to the grid or accelerating investment in climate change adaptation. FortisBC Energy Inc. and Tucson Electric Power Co. priced C$200 million and $300 million of green bonds in 2020 while earlier this year its ITC Holdings Corp. priced a small issue of green debt. Beyond preparations for green bonds from its subsidiaries, which run separate borrowing plans as they operate government-regulated assets, Fortis has set a company-wide targets to reduce of greenhouse emissions by 75% by 2035 compared to 2019 levels.

World Headlines

  • European stocks fell on Tuesday following two days of gains as China’s support measures underwhelmed investors, adding to worries about risks to the economic recovery from hawkish central banks. The Stoxx Europe 600 Index was down 0.6% as of 12:03 p.m. in London. Media and utilities stocks were among the biggest decliners, while technology underperformed following a profit warning from Snap Inc. Air France-KLM fell as much as 8.6% after plans to sell about 2.26 billion euros ($2.4 billion) of new shares to shore up its balance sheet. European stocks had been trying to recover following sharp declines since late March as investors worried about hawkish central banks plunging major economies into a recession amid surging inflation. After the Federal Reserve kicked off a rate-hiking cycle in March, President Christine Lagarde signaled yesterday that the European Central Bank was likely to start raising rates in July and exit sub-zero territory by the end of September.
  • Stocks and futures declined on Tuesday after a profit warning from Snap Inc. weighed on technology shares and fueled concerns about risks to economic growth. The Snapchat owner plunged more than 30% in premarket trading, while Meta Platforms Inc. and other companies that rely on digital advertising also tumbled. Nasdaq 100 contracts followed European and Chinese tech stocks lower. S&P 500 futures fell, just as the benchmark was starting to pull back from the brink of a bear market amid fears the Federal Reserve’s tightening could hurt growth. The dollar was little changed, while Treasuries advanced.
  • Asian stocks dipped as traders remained cautious on global growth concerns while assessing the impact of China’s fresh fiscal stimulus. The MSCI Asia Pacific Index fell as much as 1.2%, with tech names the biggest drags. Lower revenue and profit forecasts from Snap Inc. weighed on the broader sector.  Chinese stocks led declines in the region as the government’s new support package including more than 140 billion yuan ($21 billion) in additional tax relief failed to impress investors. Covid-19 lockdowns remain a key overhang, while market participants are looking to major China tech earnings this week, including Alibaba and Baidu, for direction. Hong Kong equities also dropped after the city’s outgoing leader said border controls will remain in place for now.
  • Oil was little changed as Chinese efforts to cushion the impact of anti-virus lockdowns failed to reassure investors over the outlook for Asia’s top economy. West Texas Intermediate traded near $110 a barrel, having faltered initially even as China rolled out a broad package of measures to support businesses and aid demand, including policies to help people buy cars and ensure cargo transport runs smoothly.  US benchmark oil has traded in a narrow range around $110 a barrel over the past two weeks as investors weigh the fallout from war in Ukraine, including Hungary’s opposition to a European Union ban on Russian crude, and the outlook for growth. While US oil consumption is expected to pick up further over a busy summer-driving season, energy usage in China has been crimped by the harsh lockdowns imposed in key cities to combat coronavirus outbreaks.
  • Gold was steady after four straight days of gains as investors weighed risk appetite in broader financial markets and the outlook for monetary-policy tightening. Bullion is trading near a two-week high after the dollar retreated overnight, while risk sentiment remains fragile, with stocks in Asia and US equity futures down Tuesday. Still, gains in non-interest bearing gold have been limited by rising bond yields and higher borrowing costs. The Federal Reserve will probably raise its key rate to 2% by August, with the tightening path from there dependent on how quickly inflation cools, Fed Bank of Kansas City President Esther George said Monday. Meanwhile, the European Central Bank is likely to start raising rates in July and exit sub-zero territory by the end of September, President Christine Lagarde said in a blog post.
  • Nickel paced declines in a broad retreat for industrial metals, with signs of demand weakness emerging in China while anxiety over Russian supply eases. Prices for the metal used in stainless steel and batteries slumped as much as 5.2%, while other base metals including copper and aluminum also dropped on the London Metal Exchange. Iron ore also fell, as traders shrugged off Beijing’s latest efforts to shore up growth, while UBS Group AG and JPMorgan Chase & Co. downgraded their forecasts for the nation’s economic expansion this year. Against a backdrop of general weakness in China’s metals demand, there’s been a particularly strong increase in stainless steel inventories over the second quarter, Colin Hamilton, managing director for research at BMO Capital Markets, wrote in an emailed note.
  • Wheat extended a rebound from a one-week low in Chicago as traders digested the latest data on the underwhelming quality of US winter crops and a sluggish pace of spring plantings. Futures climbed as much as 1.6%, rising for a second day. Crop conditions showed little improvement, according to a US Department of Agriculture survey, with the share of winter wheat rated “good” or “excellent” edging up just 1 percentage point from a week ago to 28% as of Sunday. That’s well below the level of 47% a year ago.
  • UK utility firms sank after it emerged Chancellor of the Exchequer Rishi Sunak has ordered officials to prepare plans for a possible windfall tax on power generators as well as oil and gas firms. Power plant operator Drax Group Plc tumbled as much as 19%, the most in nearly seven years, while energy suppliers SSE Plc and Centrica Plc both dropped as much as 11%. It also weighed on shares of UK operators listed abroad, including E.ON SE, Electricite de France SA and Iberdrola SA. “The risk around a UK windfall tax on the power sector, including renewables companies, is likely to overshadow the benefit of inflation and commodity prices,” Citigroup Inc. analyst Jenny Ping wrote in a note to clients. Citi downgraded SSE to neutral from buy and Drax to sell from neutral.
  • Air France-KLM plans to sell about 2.26 billion euros ($2.4 billion) of new shares to shore up its balance sheet and repay a chunk of the state aid that helped the carrier survive the Covid-19 crisis. The proceeds of the rights issue will be used to reimburse about 1.7 billion euros of subordinate bonds issued in April last year and held by the French government, and to further reduce debt, the Franco-Dutch airline said Tuesday. The subscription period is set from May 27 to June 9.  The transaction will bring Air France-KLM closer to completing a targeted 4 billion-euro capital increase as it seeks to pay down borrowings in line with European Union requirements on state funding, which currently bar the airline from participating in the consolidation of an industry roiled by the pandemic.
  • Across Wall Street, from BlackRock Inc. to T. Rowe Price Group Inc., some veterans of the bond market’s booms and busts are seeing signs that it’s safe to start buying again. Few are eager to call the bottom just yet, not with inflation still surging at a four-decade high and the Federal Reserve only at the early stages of an aggressive cycle of monetary policy tightening to contain it. But yields have jumped so much this year, roughly doubling those on 10-year Treasuries, that it recalls past buying opportunities that paid off when the tide turned. On top of that, there are indications that the economy is cooling, with big-box retailers reporting a shift in consumer spending and home sales on the decline. And the drubbing taken by risky assets from growth stocks to cryptocurrencies has turned Treasuries into a haven again, delivering gains to those who bought when yields peaked earlier this month.
  • US households are about to get some unwelcome mail this summer: some of the highest power bills they’ve ever seen. Residential electricity rates have been surging for months and are poised to climb even higher this summer on a combination of tight supplies of natural gas and coal, an unrelenting drought in the Western US, and a nationwide forecast for extreme heat. Barclays Plc calculates that monthly bills will be more than 40% higher than last year’s, and projections from the US Energy Information Administration show this year’s retail residential rates rising the most since 2008. It’s all pointing to a summer of pain for Americans beset by thehighest inflation in four decades. Gasoline prices have reached record highs, an order of chicken wings fetches $34, housing expenses are soaring, and now the cost of running the air conditioner could become a make-or-break expense. That’s going to force people to make tough choices, especially in places like Miami, where energy costs have increased more than in any other US city.
  • Walmart Inc. and partner DroneUp LLC plan to expand their drone-delivery hubs to 34 locations in six states by year-end, taking a big step toward scaling up aerial drop-offs for US shoppers even though big regulatory hurdles remain. Deliveries will cost $3.99 and orders can weigh up to 10 pounds, Walmart said in a statement Tuesday. The expanded network has the potential to reach 4 million US households and give Walmart the capacity to deliver 1 million packages by air in a year. But attaining those goals depends on changes to US rules that now require flights to remain within a drone operator’s line of sight. The milestone plan vaults Walmart’s partnership with DroneUp from a pilot project in northwest Arkansas to shoppers’ yards in parts of five more states: Arizona, Florida, Texas, Utah and Virginia. Tens of thousands of goods including Tylenol, diapers and hot dog buns could be eligible for drone delivery in as little as 30 minutes between 8 a.m. and 8 p.m., Walmart said.
  • Advent International has raised $25 billion for the second biggest private equity fund on record. The buyout firm, which is majority-owned by its partners, took less than six months to raise the commitments, according to a statement Monday. The pool underscores how investor demand for large-cap buyout funds remains strong despite a darkening economic backdrop. The fund — Advent International GPE X LP — drew commitments from pension funds, sovereign wealth funds, endowments and high net worth individuals. The vehicle reached its hard cap, or the maximum amount Advent wanted to raise, and boosts the firm’s assets under management to more than $100 billion.
  • The Samsung group plans to raise spending by more than 30% to 450 trillion won (about $360 billion) over the half-decade to 2026 to shore up businesses from chips to drugs, as South Korea’s conglomerates grapple with growing economic and supply shocks. The corporate giant — whose units from Samsung Electronics Co. to Samsung Biologics Co. dominate Korea’s economy — promised in a statement to create 80,000 jobs through 2026, mostly in semiconductors and biopharmaceuticals. Samsung, run by the scion of one of Korea’s oldest and wealthiest families, is one of a handful of so-called chaebol that are outlining investment plans as the country’s new president takes office. President Yoon Suk Yeol, who began his five-year term May 10, has been a vocal supporter of the conglomerates and made them a key pillar in his economic growth plans.
  • The Bank of England said UK banks and insurers face climate-related losses of £210 billion to £340 billion over the next three decades depending on how quickly the government acts to shift the economy toward net zero emissions. The UK central bank said the financial system is well placed to absorb those losses, though many of them in the worst case scenario will be passed on to consumers, with the poorest people in society hit hardest. The findings were outlined in the bank’s first ever stress test to assess how the financial services industry will cope with efforts to transition the economy away from fossil fuels and toward cleaner forms of energy. Prime Minister Boris Johnson’s government is at the forefront of a global push to rein in climate-damaging greenhouse-gas pollution.
  • Uber Technologies Inc. signed a deal with Italy’s largest taxi dispatcher that will add more than 12,000 drivers to the US company’s platform. The partnership between the ride-hailing giant and IT Taxi will bring the Uber app to more than 80 new cities in Italy starting from June, Uber said in a statement on Tuesday. It’s a move that follows similar partnerships aimed at easing driver shortages and fare pressure, and San Francisco-based Uber wants to add all taxis to its app by 2025. The Italian deal comes after similar partnerships in New York, San Francisco, Hong Kong and Madrid.
  • China’s central bank and banking regulator urged lenders to boost loans as the economy is battered by Covid outbreaks that have threatened growth this year. People’s Bank of China Governor Yi Gang and other officials met with 24 major financial institutions Monday to discuss credit conditions and work, the central bank said in a statement Tuesday. The meeting called on banks to accelerate the delivery of approved loans, and also maintain the stable growth of property loans, according to the statement.  The pledge came after data showed earlier this month that loan growth slumped sharply in April to the worst level in almost five years, as consumers and businesses shunned borrowing during the country’s Covid lockdowns. A proxy for household mortgages contracted again, prompting the PBOC to cut the minimum mortgage rate for first-time homebuyers. Lenders also lowered a key reference rate for mortgages last week.
  • Best Buy Co.’s first-quarter revenue surpassed analyst estimates, as the company bucked the retail pessimism that sparked a selloff last week. Revenue was $10.65 billion in the three months ended in late April, the consumer-electronics retailer said in a statement Tuesday. That exceeded the $10.41 billion average of analyst estimates compiled by Bloomberg. Same-store sales also fell less than expected. The results offered investors a measure of relief as US retailers struggle to shore up profit while costs soar and consumers grapple with the highest inflation rates in four decades. The worsening economic backdrop prompted Best Buy to cut its annual forecast for earnings, revenue and same-store sales.
  • At the first in-person Davos gathering in over two years, one topic among banking bosses was the people not there — workers who are choosing to work from home in the wake of the Covid pandemic. Chief executives who gathered at the Swiss resort showed there is still a divergence of approach about the future of work, even as many countries have rolled out comprehensive vaccine programs and guided people to return to their normal lives. Richard Gnodde, chief executive officer of Goldman Sachs International, one of the most ardent return to office banks, told the Davos gathering that 70% of Goldman’s workforce are now typically in the office on any given day and that the number is “drifting up.” That compares to about 80% or 85% before the pandemic.
  • Angelo Gordon & Co., the $50 billion credit and real estate investment firm, raised its second debt fund focusing on special situations and distressed companies. AG Credit Solutions Fund II LP raised $3.1 billion of equity commitments from new and existing institutional and retail investors, according to a statement seen by Bloomberg. The new fund will bring Angelo Gordon’s assets under management for distressed and special situations to $11 billion, much of it focused on providing financing to companies with liquidity and capital structure issues. The fund has already invested about 20% of the capital, according to a person with knowledge of the matter, who asked not to be identified discussing confidential information. Angelo Gordon sees opportunities stemming from the recent sell off in high-yield debt, spurred by higher interest rates and supply-chain challenges, the person said.
  • Europe’s gasoline market has rarely looked tighter, but that’s doing little to stop the continent’s oil refineries from shipping evermore of the fuel to the US. Flows to the US East Coast from Europe will jump to about 487,000 barrels a day this month, the highest since May 2019, according to Vortexa Ltd., an energy analytics firm.  Both wholesale and retail gasoline prices have soared to records in the US this month, helping to stoke inflation fears that President Joe Biden is struggling to quell. Imports, most of them flowing into New York harbor and surrounding areas, can only help a little, given that the region which includes those places consumes about 3.1 million barrels a day of the fuel.


“Do what is right, not what is easy nor what is popular.” —Roy T. Bennett

*All sources from Bloomberg unless otherwise specified