May 26, 2023

Daily Market Commentary

Canadian Headlines

  • Corporate issuers are racing to sell debt denominated in Canadian dollars as the standoff around the US debt ceiling continues and investors look to lock in the highest yields since November. Bank of Montreal is leading five issuers raising C$4.75 billion ($3.49 billion) in the Canadian dollar bond market this week, according to data compiled by Bloomberg. That’s the most since the second week of January, when five companies priced C$5.5 billion in new bond deals. Tensions around the US debt limit ratcheted higher after Fitch Ratings on Wednesday warned the nation’s AAA grade might be under threat. Meanwhile, all-in yields in the Canadian corporate bond market reached 5.247% on Wednesday, the highest since early November, according to Bloomberg indexes.

World Headlines

  • European stocks were steady Friday as investors awaited further developments around the US-debt ceiling talks, while miners surged on a strong uptick in metal prices. The Stoxx 600 Index was little changed by 10:36 a.m. in London, erasing earlier gains of as much as up 0.6%. Mining stocks jumped the most as metal prices trimmed weekly declines and Rio Tinto Plc rallied following a ratings upgrade from Morgan Stanley. Tech stocks rose for a second day adding to Thursday’s boost from Nvidia Corp.’s upbeat outlook. Global equity funds saw outflows of $3.9 billion in the week through May 24 — a third straight week of redemptions that means that flows are now flat for the asset class in 2023, according to a note from bank of America Corp. citing EPFR Global data.
  • US equity futures rose and Treasuries advanced on signs that lawmakers are making process on a deal to raise the debt ceiling. Contracts on the S&P 500 added 0.2%. Yields on two-year Treasury notes slipped under 4.5%, ending a 10-day rising streak. The tech-heavy Nasdaq 100 increased 0.3%.  In Washington, Republican and White House negotiators have narrowed differences in talks over recent days and are moving closer to an agreement to raise the debt limit and cap federal spending for two years, according to people familiar with the matter. However, details agreed to are tentative and a final accord is still not in hand, the people said.
  • Asian equities advanced, poised to snap three days of losses, as chip stocks extended their surge to a second day. Hong Kong was closed for a holiday after sliding earlier this week. The MSCI Asia Pacific Index rose as much as 0.6%, with semiconductor makers TSMC and Samsung the biggest drivers amid the global rally sparked by Nvidia’s bullish outlook for artificial intelligence demand. Taiwan’s benchmark led gains around the region. Japan’s Nikkei 255 rose back toward 33-year highs after the yen weakened, as concerns eased on progress in US debt-ceiling talks. Investors continue to snap up Asian chip names amid hopes that PC demand will begin picking up and strong demand for AI applications will help offset weakness in other areas. The MSCI regional benchmark is still on course for a weakly loss of more than 1%, however, amid uncertainties including a weak recovery in China.
  • Oil edged higher and stayed on track for a modest weekly gain as investors monitored progress in talks to avoid a US default while the dollar eased. West Texas Intermediate traded above $72 a barrel after slumping more than 3% on Thursday. Republican and White House negotiators were moving closer to an agreement to raise the debt limit, according to people familiar with the matter. Still, the details agreed to are tentative and a final accord is not yet at hand. Crude has still sunk about 10% this year as the lackluster economic recovery in top importer China and an aggressive monetary tightening campaign by the US Federal Reserve pressured prices. More US rate increases may be in store, with traders pricing in another quarter-point gain within the next two meetings.
  • Gold was poised for its biggest weekly drop in almost four months as signs of resilience in the US economy increased the likelihood the Federal Reserve will keep hiking rates.  Bullion was steady on Friday after falling to a two-month low in the previous session as US gross domestic product data came in ahead of estimates. The precious metal is down 1.9% so far this week.
  • Republican and White House negotiators are moving closer to an agreement to raise the debt limit and cap federal spending for two years, according to people familiar with the matter, as time grows short to avert a catastrophic US default. The two sides have narrowed differences in talks over recent days, according to the people, though the details agreed to are tentative and a final accord is still not in hand. The two sides have yet to agree on the amount of the cap. Under the terms of the emerging agreement, defense spending would be permitted to rise 3% next year in line with President Joe Biden’s budget request.
  • Germany has been Europe’s economic engine for decades, pulling the region through one crisis after another. But that resilience is breaking down, and it spells danger for the whole continent. Decades of flawed energy policy, the demise of combustion-engine cars and a sluggish transition to new technologies are converging to pose the most fundamental threat to the nation’s prosperity since reunification. But unlike in 1990, the political class lacks the leadership to tackle structural issues gnawing at the heart of the country’s competitiveness.  “We’ve been naïve as a society because everything seems fine,” BASF SE Chief Executive Officer Martin Brudermüller told Bloomberg. “These problems we have in Germany are accumulating. We have a period of change ahead of us; I don’t know if everyone realizes this.”
  • UBS Group AG and Credit Suisse Group AG are offering a rare incentive for their wealth bankers in Asia to bring in fresh cash, underscoring the challenges the former Swiss rivals face to ensure stability as they seek to complete a government-orchestrated merger. Relationship managers at both firms will receive commissions of 15 basis points, or $0.15 for each $100 in new client money they can bring in, according to people familiar with the matter, asking not to be identified discussing private information. That’s more attractive than existing bonuses at the two firms and the typical incentives in the industry, which are usually tied to inflows of a narrower slice of fee-generating assets and can often include other hurdles that must be met, said the people.
  • Marvell Technology Inc. surged 16% during premarket trading in New York on Friday after the chipmaker said it expects revenue from artificial intelligence to soar this year, capitalizing on a spending boom that also sent Nvidia Corp. on a record-setting rally this week. Sales of AI-related products will at least double in its current fiscal year, Marvell said in a statement Thursday. Adjusted earnings for the first quarter also came in just above analysts’ estimates. The stock ended Thursday’s session up 7.6% to $49.47 and has gained 33.6% during the year to date.
  • Comcast Corp. Chief Executive Officer Brian Roberts has a penchant for lining up a huge deal around every five years or so. It was 2018 the last time he made a big acquisition, and Wall Street is ready for his next dramatic move. The stakes have arguably never been higher for the media and communications giant: Comcast is losing cable TV subscribers at record rates. Growth in its broadband internet business has dried up amid fierce competition from the likes of Verizon Communications Inc. and T-Mobile US Inc. The NBCUniversal division has been shaken by the departures of CEO Jeff Shell, who was ousted last month amid sexual harassment allegations, and ad chief Linda Yaccarino, who jumped ship to run Twitter. The likely sale of streaming service Hulu looms large and Hollywood writers are on strike. Comcast’s shares are down about 32% since peaking nearly two years ago. As the largest cable TV and broadband provider in the US, Comcast has gotten too big to acquire any more cable companies. But Roberts has embraced the idea of owning more of the content his cable system can deliver. His next big move will most likely involve Comcast’s media division, an entertainment business that includes the NBC broadcast network, a stable of cable channels, the Universal and DreamWorks movie studios, streaming platforms including Peacock and a stake in Hulu, and theme parks. And yet, Comcast lacks the breadth and depth of content to rival Disney and Netflix.
  • Gap Inc. reported better-than-expected results in the first quarter, showing the retailer’s cost-cutting measures are sparking improved performance. Gross margin in the period came in above the average analyst estimate, while adjusted earnings per share were slightly positive, compared with an expected loss. The improvement was due in part to lower air freight expense and fewer discounts, the company said. Gap has also reduced headcount and trimmed expenses.  Comparable sales, meanwhile, declined by 3% across Gap’s four brands. That was due mostly to large drops at Banana Republic and Athleta, while Old Navy fell slightly and the Gap brand posted a 1% increase. The results suggest that Gap will need to do more beyond cost-cutting measures to reposition its brands for longer-term growth.
  • A rally in movie-theater operators will be put to the test as the debut of Walt Disney Co.’s The Little Mermaid provides the latest gauge of movie-going demand after the Covid-19 pandemic. Five operators, including AMC Entertainment Holdings Inc. and IMAX Corp., have gained an average of 32% so far this year. Cinemark Holdings Inc. leads the pack, up 94%, though the group’s rally has cooled since a pop following April’s The Super Mario Bros. Movie debut. Now, investors will see if The Little Mermaid, which releases Friday, can attract the crowds needed to build on that momentum. “I wouldn’t normally expect one movie to necessarily move theater stocks in one direction or another,” said B. Riley Securities analyst Eric Wold. But given that children and families have been “underrepresented” at the box office recently, “this could be a key piece to driving confidence in the industry’s recovery.”
  • A breakout in a closely watched corner of the bond market is signaling the Federal Reserve has more to do to rein in inflation, throwing cold water on prospects of cutting rates anytime soon. Real yields have featured prominently during this month’s selloff in the Treasury market, with the two-year rate adjusted for inflation reaching levels unseen since 2009, and the 10-year rate climbing back toward March highs. These real yields are an important gauge of the actual borrowing costs for the broader economy and as such are seen as a tool watched by the Fed in its campaign to pull down inflation. But the latest swing higher in real yields shows that in spite of fraught debt-ceiling negotiations, the world’s biggest bond market senses another jolt of policy tightening and an extended period of staying on hold may be warranted. A similar outlook is being echoed in the swaps market, with traders almost fully pricing in a quarter-point hike within the next two policy meetings.