May 27, 2022

Daily Market Commentary

Canadian Headlines

  • National Bank of Canada’s fiscal second-quarter results got a boost from a surge in trading as recession fears roiled markets. Revenue in the financial-markets unit rose 7.7% to C$632 million ($496 million) in the three months through April, the Montreal-based lender said Friday. That beat analysts’ C$524.4 million average projection. Overall profit also topped estimates. Escalating concerns that global central banks’ aggressive rate increases will hurt the economy have hammered equity and bond markets this year. While that has put a chill on financing transactions, it has caused a surge in trading volume that has benefited firms like National Bank. The company’s trading revenue rose 40% to C$349 million. National Bank shares have fallen 1.6% this year, compared with a 3.6% drop for the S&P/TSX Commercial Banks Index.

World Headlines

  • European stocks rose, heading for their best weekly advance since mid-March as investors returned to risk assets, lured by cheaper valuations.  The Stoxx Europe 600 Index added 0.6% by 9:57 a.m. in London. Consumer and tech sectors outperformed, while utilities and energy shared lagged after the UK government announced windfall tax plans on oil and gas companies on Thursday. While European stocks have been under pressure this year amid a flurry of concerns spanning the war in Ukraine and recession fears from central bank tightening, dip buyers returned this week. Citigroup Inc. strategists recommend buying European shares following the selloff on their appealing valuations compared to the US after a steep global selloff.
  • Stocks rallied as dip buyers returned, setting markets up to snap seven weeks of declines. US futures advanced after shares climbed Thursday on signs consumers remain resilient despite inflationary pressures. Didi Chuxing Inc. jumped in premarket trading after a Bloomberg News report that state-owned automaker China FAW Group is considering acquiring a significant stake in the ride-hailing company. Global equity funds saw their biggest inflows in 10 weeks, led by US stocks, as cheaper valuations lured buyers after a steep selloff on recession fears. The selloff made valuations attractive and enticed investors back into a market still shadowed by worries about inflation and higher interest rates, China’s downbeat economic outlook and the war in Ukraine.
  • Asian stocks advanced as upbeat earnings from Alibaba and Baidu eased some fears on the economic impact of China’s Covid lockdowns and fueled risk-on sentiment. The MSCI Asia Pacific Index rose 1.6%, poised for its first gain in four sessions, led by consumer discretionary and technology shares. Most markets in the region were up, led by Hong Kong. Alibaba and Baidu both delivered better-than-expected quarterly sales growth, providing investors with some relief after Tencent’s recent lackluster report and amid concerns over China’s virus measure and regulatory crackdowns. The Hang Seng Tech Index, which tracks the nation’s tech giants listed in Hong Kong, surged 3.8%.
  • Oil is heading for a modest fifth weekly gain before the US summer driving season kicks off this weekend, with motorists facing soaring costs on the back of tightening stockpiles. West Texas Intermediate futures fluctuated near $114 a barrel on Friday after closing 3.4% higher in the previous session. Nationwide gasoline stockpiles are at the lowest seasonal level since 2014, while diesel supplies are even tighter in some regions, helping push prices at the pump to records. Fuel markets have tightened globally following Russia’s invasion of Ukraine in late February, which has upended trade flows and fanned inflation. The Biden administration is reaching out to oil companies to inquire about restarting shuttered refineries, according to a person familiar with the matter.
  • Gold climbed as the dollar weakened ahead of US inflation data that will give an insight into the persistence of price pressures. The PCE deflator, a gauge favored by the Federal Reserve, is expected to show inflation cooled in April from the month before. Evidence that price pressures are easing may soften expectations of aggressive rate hikes by the US central bank. Bullion may eke out a weekly gain as the dollar heads for its second straight week of losses. US gross domestic product is contracting at a faster-than-expected rate and minutes released from the Fed’s latest meeting had a less-hawkish-than-feared tone, which helped buoy the non-interest bearing precious metal.
  • Boris Johnson urged more military support for Ukraine as it battles Russian forces, including sending advanced weapons such as Multiple Launch Rocket Systems that can strike targets from a far longer distance. The British prime minister aired his support for more arms for Ukraine as he pushed back against the idea that, with the war now in its fourth month, President Volodymyr Zelenskiy should focus instead on reaching a peace deal with Russia that could see Ukraine cede territory. Ukraine has been asking nations to supply it with the MLRS as it grapples with advances by Russian troops in the eastern Donbas region. That request has been met with some caution on whether it would bring allied nations closer to direct confrontation with Russia. While the MLRS would be more effective against Russian artillery, its deployment would add to the risk that missiles land over the border in Russia, whether intentionally or by accident.
  • US wage growth looks to be peaking, a heartening development for the Federal Reserve if not for American workers. After handing out hefty salary increases over the past year, companies are now becoming more cautious with their cash over concern further big payouts will eat into profits, according to staffing companies, business owners and recent surveys. Economists are penciling in a moderation in annual earnings growth to 5.2% in May from April’s 5.5% in data out next week. Those figures are among the highest in records dating back to 2007. Employers have had success passing on higher labor costs to customers so far, but may be reaching a tipping point at which higher price depress demand. That’s exactly what the Fed is hoping for in its all-out mission to tame some of the worst inflation in 40 years.
  • The US Securities and Exchange Commission has a lot of complicated new issues on its plate, from crypto to the aftermath of the meme-stock explosion. Now add this: A movement to cut back on regulators’ legal authority is making headway in court. Hedge fund manager George Jarkesy spent almost a decade battling an SEC in-house judge’s ruling against him for allegedly misleading investors in two of his funds. On May 18 two judges with the US Court of Appeals for the Fifth Circuit agreed that the SEC violated his constitutional right to a jury trial when it put its case before what’s known as an administrative law judge. The immediate impact of the decision for the SEC may be limited, since the agency has been sending fewer cases to these judges in recent years. But the long-term implications could be sweeping. In addition to saying Jarkesy was entitled to a jury, the appeals court leaned on a different, more controversial legal theory called the nondelegation doctrine.
  • Russia’s ability to sidestep its first foreign default in a century is turning more fraught as another payment comes due on the warring nation’s debt. Investors are supposed to receive about $100 million of interest on Russian foreign debt in their accounts by Friday, payments President Vladimir Putin’s government says it has already made. That’s unlikely to satisfy concerned bondholders who are keen to see the cash after the US Treasury closed a loophole that previously allowed American banks and individuals to accept such payments. It’s the latest twist in a debt saga that has dragged on for months as the war in Ukraine and sanctions complicate the flow of cash from Russia to creditors. If Russia’s obligations aren’t fulfilled, a 30-day grace period ensues.
  • Some European Union leaders are leaning toward a deal that would ban seaborne oil while temporarily sparing deliveries through a key pipeline to give landlocked Hungary more time, as the bloc tries to reach an agreement on a new sanctions package targeting Russia for its war in Ukraine. EU governments are discussing a plan with the European Council and European Commission that would make shipments of oil through the giant Druzhba pipeline exempt for a limited period of time from a broader ban on oil deliveries to the bloc, according to people familiar the matter.  The compromise would buy time for Hungarian Prime Minister Viktor Orban to iron out technical details of phasing out pipeline supplies to his country, said the people, who asked not to be identified because the talks are private.
  • BP Plc said it will look again at its plans in the UK, raising questions about whether a £5 billion windfall tax on oil and gas profits announced by the government included enough incentives to preserve investment. The statement opens up the possibility of reversal by the London-based oil major, which has previously said that planned investments of £18 billion ($23 billion) in the country by 2030 weren’t contingent on whether or not the government raised taxes.  The UK government announced on Thursday that it will impose a 25% windfall tax on oil and gas companies, bowing to mounting pressure to support Britons facing a record squeeze on living standards. Chancellor of the Exchequer Rishi Sunak appeared to try to head off criticism that the measure was anti-business, including in the proposal an 80% new-investment allowance that means energy companies can reduce the amount they pay if they commit to fresh capital expenditure.
  • Global equity funds saw their biggest inflows in 10 weeks, led by US stocks, as cheaper valuations lured buyers after a steep selloff on recession fears. Investors added about $20 billion to global stocks in the week to May 25, led by inflows into the US, according to Bank of America Corp.’s note citing EPFR Global data. Cash led the inflows among asset classes with about $28 billion, signaling market participants continue to search for havens. Bond fund outflows reached $5.8 billion. Equities have staged a recovery this week, with the US and European indexes heading for their biggest weekly advance since mid-March as investors bought the dip after strong declines. Citigroup Inc. strategists this week recommended stepping back into stocks, particularly in Europe and emerging markets, on their appealing valuations, while cutting their recommendation on US stocks to neutral.
  • Brevan Howard Asset Management is expanding its traditional macro business into credit trading. The investment firm has allocated more than $1 billion to a group of credit trading specialists, according to people with knowledge of the matter. The move is seen internally as a new growth area for Brevan Howard, which has until now mainly focused on rates trading, derivatives and relative value strategies, said the people, who asked not to be identified because the information is private. Brevan Howard is transforming itself into a broad asset management firm under Chief Executive Officer Aron Landy. The firm’s main hedge fund gained about 13% through May 20 this year, while its assets have more than tripled to $22 billion over the last three years, according to investor documents seen by Bloomberg.
  • Gap (GPS US) shares dropped as much as 17% in US premarket trading with analysts saying that the retailer’s guidance cut was more than expected, prompting brokers to lower their targets and downgrade the stock given a worsening macroeconomic environment could trigger further bad news.
  • Costco (COST US) shares dropped 2.1% in US after-hours trading on Thursday. While Costco’s margins disappointed analysts, brokers were generally positive on how the wholesale retailer is navigating an environment with rising inflation by controlling expenses.
  • Bitcoin is regaining its dominance of the cryptocurrency universe. It now accounts for 44% of total crypto market value, the most since October, just before the latest bull market peaked, based on data from CoinGecko. Bitcoin’s renewed hegemony is a reflection of how the collapse of the TerraUSD stablecoin earlier this month has ravaged smaller tokens like Avalanche and Solana.  The largest cryptocurrecy was down about 1.5% on Friday, making it a relative safe haven compared with altcoins like Avalanche, which tumbled as much as 11%. Bitcoin has also been outperforming second-largest token Ether, which has been rocked by concerns about a glitch in the effort to make its underlying blockchain less energy intensive.
  • Long before Broadcom Inc. sealed a deal to buy VMware Inc.for $61 billion Thursday, it eyed the company secretly from a distance.  VMware had been one of the assets at the top of Broadcom’s target list for some time, according to people familiar with the matter, but the suitor quietly scrutinized the business before it went further. Broadcom crunched numbers, scoped out VMware’s products and ran scenarios for about a year before making an approach, said the people, who asked not to identified because the deliberations were private. Thus began what is set to be the biggest takeover by a chipmaker in history and one of the top tech deals of all time. Thursday’s agreement marries a sprawling semiconductor company with a Silicon Valley software pioneer — a merger few had anticipated before Bloomberg broke news of the talks earlier this week. Broadcom plans to make VMware the linchpin of its software strategy, reducing its reliance on the boom-and-bust chip industry.
  • Russian steelmakers were the most profitable across the global industry before the war in Ukraine, but now they’re being forced to sell to some buyers at heavy discounts. The country’s producers have seen their options dwindle as sanctions choke sales to the key European market and customers elsewhere become more wary of dealing with Russian companies. With producers searching for alternative buyers, those that are willing to purchase want to do so at lower prices. For example, heavyweights such as Severstal PJSC are facing demands from importers in Asia to sell at discounts of as much as 40% to the market price for steel slab, according to three people familiar with the matter, who asked not be identified as the information isn’t public. Customers in Turkey also want price cuts, the people said
  • Citigroup Inc. strategists cut their recommendation on US stocks to neutral on the risk of a recession, joining an increasing number of banks in warning of a growth slowdown. The market is showing “elements of a deflating bubble” with high uncertainty and the lack of reassurance from the Federal Reserve, strategists including Dirk Willer wrote in a May 27 note. “Given that it will likely take time for the Fed to react to equity and growth weakness, we take our long standing US equity overweight back to zero,” they wrote. The New York-based bank joins BlackRock Inc. and Morgan Stanley in flagging risks stemming from a slowing US economy as the Federal Reserve tightens to curb inflation. But opinion on US equities remains divided, with some Wall Street analysts betting on a rebound in the belief that the odds of recession are overstated.
  • China Evergrande Group is considering repaying offshore bondholders owed around $19 billion with cash installments and equity in two Hong Kong-listed units, Reuters reported, citing two people familiar with the matter.  Evergrande is looking to repay offshore creditors the principal and interest by turning them into new bonds that will be repaid in installments over seven to 10 years, Reuters said, citing one person. It added that offshore creditors would be allowed to swap parts of their debt into stakes in Evergrande’s property services unit, Evergrande Property Services Group Ltd., and its electric vehicle unit China Evergrande New Energy Vehicle Group Ltd. One person added that 20% of the offshore debt can be swapped into equities of those two units, according to Reuters. Evergrande has $22.7 billion worth of offshore debt including loans and private bonds deemed to be in default after missing payment obligations.


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

*All sources from Bloomberg unless otherwise specified