May 31, 2022
Daily Market Commentary
- Rogers Communications Inc. and Shaw Communications Inc.agreed not to close their C$20 billion ($15.8 billion) deal until antitrust problems are dealt with and said they’re working to negotiate a solution to satisfy Canadian regulators’ concerns. The companies agreed to a temporary halt on completing the merger. That removes one possible scenario — that they would attempt to close the deal and then engage in a protracted court battle with Canada’s Competition Bureau, which is trying to block it. Instead, Rogers and Shaw will either have to negotiate a settlement with the bureau or defeat it in an expedited hearing at the Competition Tribunal, a body similar to a court that hears antitrust cases. The side deal with the competition watchdog “allows the parties to focus on addressing the commissioner’s concerns with the transaction in order to reach a settlement,” Rogers and Shaw said Monday in a news release.
- Gold Fields Ltd. agreed to buy Canada’s Yamana Gold Inc. for about $7 billion in an all-share deal that will make the South African miner the world’s No. 4 gold producer. Yamana has mines in Canada, Argentina, Chile and Brazil, and Gold Fields said the acquisition fits with its strategy of expanding in “mining friendly” jurisdictions across the Americas. Chief Executive Officer Chris Griffith said it was a “monster deal” that provides a solution to the relatively short lifespan of Gold Fields’ existing operations, though it would take time to explain the potential benefits to shareholders. Gold Fields fell as much as 15% in Johannesburg, erasing this year’s gains. The company will offer 0.6 of one of its shares for each Yamana share. Based on the 10-day volume weighted average traded price of Gold Fields’ American depositary shares, the deal would imply a 34% premium to Yamana’s closing share price on May 27, the company said.
- European stocks were on course for a fourth monthly decline in five as worries about high inflation and hawkish central banks outweighed the lure of cheaper valuations. The Stoxx 600 Index was down 0.5% at 11:33 a.m. in London as data showed euro-zone inflation accelerated to a fresh all-time high, just 10 days before a crucial European Central Bank meeting where officials are set to announce the conclusion of large-scale asset purchases and confirm plans to raise interest rates in July for the first time in more than a decade. Energy shares were the biggest gainers as oil jumped as European Union leaders agreed to pursue a partial ban on imports of crude from Russia. Travel and leisure stocks were the biggest decliners along with real estate.
- Stocks slipped and US equity futures fluctuated, while bonds fell Tuesday as euro-zone inflation accelerated to a fresh all-time high, intensifying the debate at the European Central Bank about how rapidly to raise interest rates. S&P 500 contracts were down by about 0.4% and those on the Nasdaq 100 switched between gains and losses. Treasury yields climbed across the curve, joining Monday’s selloff in German bunds and European bonds. The dollar advanced. US energy stocks rose in premarket trading, tracking the advance in crude oil prices. Exxon Mobil Corp. was up as much as 1.6% and Chevron Corp. as much as 1.4%.
- Asian stocks rose Tuesday, helped by a rally in Chinese shares after Shanghai further eased virus curbs and the nation’s factory activity showed signs of improvement. The MSCI Asia Pacific Index climbed as much as 0.5% Tuesday, on track for the first monthly advance this year, even as investors sold US Treasuries on renewed inflation concerns. Chinese stocks capped their longest winning streak since June. Asia stocks are on track to eke out a gain of less than a percentage point in May as the easing of China’s lockdowns improves the growth outlook for the region. Still, the impact of aggressive monetary-policy tightening on US growth and higher energy and food costs globally are weighing on sentiment in the equity market as traders struggle to assess the earnings fallout.
- Oil headed for its longest run of monthly gains in more than a decade as European Union leaders agreed to pursue a partial ban on imports of crude from Russia while China further eased anti-virus curbs, aiding demand. Brent crude topped $124 a barrel, hitting the highest level since early March. The latest round of EU sanctions would forbid buying oil from Russia delivered by sea but includes a temporary exemption for pipelines, European Council President Charles Michel said. The package, designed to punish Moscow for the invasion of Ukraine, also proposes a ban on insurance related to shipping oil to third countries. Crude has soared this year as the conflict in Europe tightened global supplies at a time of rising demand, depleting stockpiles and boosting product prices to all-time highs. Brent and US benchmark West Texas Intermediate are on course to close out sixth monthly climbs in May. Oil prices have also been lifted as US motorists kick off the nation’s busy summer driving season just as authorities in China loosen anti-virus curbs that had hurt energy consumption.
- Gold was little changed on Tuesday — and was headed for a second monthly drop — as investors weighed an easing of China’s virus outbreak that’s damping its haven appeal against recession fears in the US. Bullion earlier fell as much as 0.5% earlier in the session after China’s commercial hub said it would let people in low-risk areas leave their housing compounds, and restore public transport services from Wednesday. Dollar strength and an increase in US Treasury yields also weighed on non-interest bearing bullion. Spot gold was little changed at $1,850.69 an ounce as of 10:45 a.m. in London, and is down 2.5% this month. The Bloomberg Dollar Spot Index rose 0.3%. Silver fell for a second day, while platinum was little changed and palladium advanced 1.1%.
- Iron ore rose for a third day — the longest run of gains in a month — as more evidence that China’s Covid-19 outbreaks are easing buoyed the demand outlook for the steel-making ingredient. Shanghai announced steps to dismantle its lockdown, while local virus cases across the country fell below 100 for the first time since early March. Construction on certain key projects in the steel-making hub of Tangshan resumed from Tuesday, the city government said on its official Weibo account. If the coronavirus continues to ebb in China that should set the stage for a rebound in economic activity that will eventually flow through into stronger demand for iron ore. Beijing’s Covid Zero policy is still a risk, however, if fresh outbreaks lead to more lockdowns.
- Euro-zone inflation accelerated to an all-time high, intensifying the debate at the European Central Bank about how rapidly to raise interest rates from record lows. Consumer prices jumped 8.1% from a year earlier in May, exceeding the 7.8% median estimate in a Bloomberg survey. The acceleration was driven by food and energy after Russia’s invasion of Ukraine sent commodity prices soaring. A gauge that excludes volatile items like those rose 3.8%. With rate hikes in full swing in the US and the UK, the ECB is preparing to lift borrowing costs for the first time in more than a decade to combat the 19-member currency bloc’s unprecedented price spike.
- Telecom Italia SpA is seeking an enterprise value of around 20 billion euros ($21.5 billion) for the landline network it plans to sell to Italy’s state lender and a group of international funds, according to people with knowledge of the matter. The company’s shares rose as much as 5.9% and traded up 4.5% at 10:33 a.m. in Milan following Bloomberg’s initial report of the plan. That marked the best performance on Italy’s benchmark FTSE MIB index, giving the carrier a market value of about 6.4 billion euros. The proceeds would allow the former phone monopoly, which has an enterprise value of about 36 billion euros and debt of around 30 billion euros according to Bloomberg data, to cut its debt pile, accelerating Chief Executive Officer Pietro Labriola’s turnaround plan, said the people, asking not to be named because the internal calculation isn’t public. The valuation is preliminary and could change, they said.
- Investors added money to exchange-traded funds that buy emerging market stocks and bonds last week. This was the second straight week of inflows. Inflows to U.S.-listed emerging market ETFs that invest across developing nations as well as those that target specific countries totaled $1.74 billion in the week ended May 27, compared with gains of $1.06 billion in the previous week, according to data compiled by Bloomberg. So far this year, inflows have totalled $21.8 billion.
- Deutsche Bank AG and its asset management unit had their Frankfurt offices raided by police, adding to the legal headaches facing Germany’s largest lender. Law enforcement officials on Tuesday morning entered the twin towers where Germany’s largest lender is headquartered, as well as the nearby premises of DWS Group, according to a statement from the prosecutor that confirmed an earlier Bloomberg report. The search is related to accusations of greenwashing against the asset manager. DWS has faced regulatory probes in the US and Germany after its former chief sustainability officer, Desiree Fixler, went public with greenwashing allegations last year. While the company has denied the claims, the raid adds to a list of regulatory and legal issues for Deutsche Bank Chief Executive Officer Christian Sewing just as he emerges from a successful turnaround of the lender.
- SAS AB announced its second major rescue package in as many years, seeking to shore up finances depleted by the coronavirus pandemic while warning that Scandinavia’s largest carrier needs the financial lifeline to stay afloat. The airline on Tuesday announced a $3 billion restructuring plan, which involves raising equity capital — mostly from new investors — and converting existing debt into stock. Its shares fell as much as 10% in Stockholm. The aviation industry is reeling from more than two years of pandemic and related curbs that crippled travel while costs continued to run. While travel is starting to rebound, carriers remain wary of prospects beyond the summer as inflationary pressures add to expenses and weigh on consumer spending. A number of SAS peers, including Air France-KLM and Deutsche Lufthansa AG, have also raised funds.
- The relief rally in US equities has limited scope to go much further as risks to growth remain prevalent, according to Morgan Stanley’s Michael Wilson. “Last week’s strength will prove to be another bear market rally in the end,” the strategist wrote in a note. “The key fundamental call we are focused on now is slowing growth, and our view that earnings estimates are too high.” Morgan Stanley sees the S&P 500 reaching a maximum of 4,250 to 4,300 points in the current rally, a 3.4% gain from Friday’s close. The Nasdaq and small cap stocks are likely to rebound more on a percentage basis, as they usually tend to do in such circumstances, Wilson said.
- Blackstone Inc. is testing a new way to bring in cash from rich Europeans. If it succeeds, the private equity powerhouse stands to draw billions to the fast-growing and risky world of private credit. Regulators last week approved Blackstone’s application to start a private credit fund in Europe with a structure similar to an open-end mutual fund. The key difference is that it can run in perpetuity, unlike traditional private credit funds that have a fixed lifespan. For Blackstone, it means cash can be recycled into new investments as loans are repaid, promising a steady stream of fees for managers. Blackstone’s fund will be the first of its kind in Europe, where direct lending has exploded into a $300 billion industry in the span of a few years, and a shift in how the funds are traditionally structured. Usually, non-bank lenders run closed-end funds over a set number of years, and fees are only paid on invested capital.
- The OPEC+ coalition will likely hold firm to its oil production plans this week even as the European Union moves to sanction group member Russia, delegates said. Global oil supply and demand levels remain stable, with no severe disruption yet to Russian exports, and thus require little action from the 23-nation alliance, according to the officials. With most members besides Saudi Arabia and its neighbors struggling to increase production, the group’s decisions are in any case becoming largely symbolic. Oil prices continue to climb, surpassing $124 a barrel in London on Tuesday, as the EU’s planned embargo stands to tighten a global market already squeezed by rising fuel consumption and limited supplies. The rally has fed into the inflationary pressure that threatens to tip the global economy into recession, and the cost-of-living crisis hitting consumers around the world.
- German contract for next year, a benchmark for European power prices, rose in sixth consecutive sessions to the highest level this year with rising fuel cost as sanctions limit Russian energy supplies. The contract is now trading at the highest level since the market expected a complete cut-off of Russian gas flows at the end of last year, while the underlying future for 2023 is at a record level. A very tight market situation is expected next year as Russia plans to halt gas flows to an increasing number of countries that refuse to pay in rubles, on top of a full import ban set for August of Russian coal by the European Union. Europe is trying to top up its energy supplies ahead of the winter to limit the worst consequences. Coal stocks in northwest harbors have reached their highest level since October 2020 this month with more deliveries coming in ahead of a ban, while flows of Russian gas continues to refill storage levels, energy consultant Sweco said in emailed note. EU gas storage levels are 46% full, the highest level since the start of the year and close to the 10-year seasonal average.
- Royal DSM NV will combine with Swiss ingredients maker Firmenich to form the largest maker of fragrances, completing its transformation from chemicals company into one more focused on consumer goods. The enlarged company will have annual revenue of more than 11 billion euros ($12 billion), the companies said Tuesday. DSM shares rose as much as 13% in Amsterdam. The deal crowns DSM’s transformation as the Dutch chemicals company sheds its engineering arm and joins up with a closely held flavor maker that has been owned by the same family for more than a century. The proposed transaction forms a challenger in the niche market of perfume scents as well as food and beverage flavors. The industry is dominated by just a few companies including Givaudan SA, and which serve customers including Nestle SA and LVMH.
- GlaxoSmithKline Plc agreed to buy Affinivax Inc. for as much as $3.3 billion to gain next-generation experimental vaccines. The agreement includes an upfront payment of $2.1 billion and two potential development milestones, GSK said in a statement Tuesday. The transaction for the closely held company is expected to close in the third quarter. GSK is looking to boost its pipeline of new medicines as as the drugmaker prepares to split with Haleon, the maker of Panadol painkillers and Sensodyne toothpaste, in July. Last month, it announced a takeover of Sierra Oncology, a maker of targeted therapies for rare forms of cancer.
- China’s daily virus cases fell below 100 for the first time since early March after months of strict curbs, though omicron’s contagiousness means the reprieve from infections and Beijing’s intensive Covid Zero response may only be temporary. The country reported 97 new cases for Monday, according to the National Health Commission. The financial hub of Shanghai, formerly the epicenter of China’s outbreak, reported 31 cases, as the city prepared to further loosen curbs. Beijing found 18, though the capital continues to see infections popping up in the community despite extensive contact tracing and isolation.
- They are creations of easy credit, beneficiaries of central bank largesse. And now that the era of unconventional monetary policy is over, they’re facing a challenge like never before. They are America’s corporate zombies, companies that aren’t earning enough to cover their interest expenses, let alone turn a profit. From meme-stock favorite AMC Entertainment Holdings Inc. to household names such as American Airlines Group Inc. and Carnival Corp., their ranks have swelled in recent years, comprising roughly a fifth of the country’s 3,000 largest publicly-traded companies and accounting for about $900 billion of debt. Firms that could once count on virtually unfettered access to the bond and loan markets to stay afloat are being turned away as investors girding for a recession close the spigot to all but the most creditworthy issuers. The fortunate few that can still find willing lenders face significantly higher borrowing costs as the Federal Reserve raises interest rates to tame inflation of more than 8%. With surging input costs poised to eat away at earnings, it’s left a broad swath of corporate America with little margin for error.
- Diesel prices jumped and the futures signaled more near-term tightness after European Union leaders agreed to pursue a ban on buying refined petroleum products from Russia by sea. The price of diesel futures relative to crude oil — known as the crack spread — surged as much as 19% to more than $40 a barrel earlier on Tuesday, according to fair value data compiled by Bloomberg. The measure is on course for the highest close since early May, moving closer toward a record set in April. Russia is by far the biggest external supplier of diesel-type fuel to the EU, accounting for more than 40% of the bloc’s imports in 2020, Eurostat data compiled by Bloomberg show. The vast majority — if not all — of the region’s deliveries from Russia arrive by ship rather than pipeline or other land-based forms of transport, meaning the ban would effectively halt Russian supplies.
- Unilever Plc appointed Nelson Peltz as a non-executive director, sending shares to their biggest gain in four months on expectations the activist investor will shake up the slow-growing consumer-goods giant. Peltz will join the board in July and become a member of the compensation committee, London-based Unilever said Tuesday. His Trian Fund Management has taken a 1.5% stake in the company, which makes everything from Magnum Ice-cream to Dove Soap. The appointment looks set to heighten pressure on Chairman Nils Andersen and Chief Executive Officer Alan Jope to boost returns after a failed effort to buy the consumer division of GSK Plc infuriated some shareholders.
“Do what is right, not what is easy nor what is popular.” —Roy T. Bennett
*All sources from Bloomberg unless otherwise specified