May 31, 2023

Daily Market Commentary

Canadian Headlines

  • Glencore Plc is getting closer to increasing its offer for Teck Resources Ltd., in a move aimed at ending weeks of limbo in the battle over the Canadian miner’s future. The Switzerland-based commodities giant is working on a potential improvement to its bid that could be announced as soon as the coming weeks, according to people familiar with the matter, who asked not to be identified discussing private information. By raising its offer and ratcheting up shareholder pressure, Glencore is seeking to force Teck to the negotiating table, the people said. The bitter fight that transfixed the mining world moved behind the scenes since late April, when Teck’s board was forced into an embarrassing reversal after failing to win enough investor support for a plan to split the company. Teck at the time reiterated its opposition to Glencore’s $23 billion bid, and Glencore repeated that it was willing to go higher, but there has been little public movement since then.
  • Canadian venture capital investors have about $10 billion of dry powder to spend and cash-hungry startups are going to need it soon, according to the government’s bank for small business. Many VC-funded companies face the risk of running out of money in the next 12 months without new financing, despite efforts to slow their rate of cash burn, said a report by Business Development Bank of Canada’s venture capital unit. “We anticipate that companies in our portfolio and across the ecosystem will put a premium on cash in the coming months.” Venture capital investments in Canada fell sharply last year, mirroring global trends, as higher interest rates caused investors to radically cut their valuations for early-stage companies. Deal volumes declined last year to C$10 billion ($7.3 billion), about a third lower than in 2021, BDC Capital said. There were fewer transactions and the average one was 24% smaller.

World Headlines

  • European stocks pared losses as traders assessed the outlook for inflation and interest rates, while the region’s luxury goods names slumped as data showed a faltering economic recovery in the key Chinese market. The Stoxx Europe 600 fell 0.3% by 10:58 a.m. in London, trimming an earlier decline of as much as 0.9%. Luxury stocks were among the biggest laggards after weaker-than-expected readings of Chinese manufacturing and services activity for May. Energy stocks retreated as oil slumped. Headed for their worst month since December, European stocks have sharply underperformed US peers, which have gotten support from a debt-limit agreement as well as developments in artificial intelligence. European equity investors are concerned about China’s uneven recovery and the path of interest rates. Euro-area figures due Thursday should show how much work the European Central Bank still has to tame price pressures.
  • US equity futures slipped along with European stocks as China’s economic woes weighed on investor sentiment, while bonds gained amid signs of easing inflation. Futures on the S&P 500 and Nasdaq 100 pointed to a muted day for US equities after a rally on Wall Street, fueled by excitement over artificial intelligence, fizzled on Tuesday. Treasury yields fell and a gauge of the dollar gained for the first time in four days. Investors also remain focused on the debt-limit deal forged by President Joe Biden and House Speaker Kevin McCarthy. The bill is heading for a House vote Wednesday after clearing a crucial procedural hurdle with just days remaining to avoid a US default. Congress is racing to pass the measure before June 5, the date when Treasury Secretary Janet Yellen has warned the US risks default.
  • Asian equities fell, led by shares listed in Hong Kong, as weaker-than-expected manufacturing data showed the Chinese economy continues to struggle. The MSCI Asia Pacific Index dropped as much as 1.5%, set for its biggest decline since March 14, with a gauge of Chinese stocks in Hong Kong closing in a bear market. Data Wednesday showed China’s manufacturing activity contracted for a second month in May, offering the latest proof that the post-Covid recovery is stalling. Broad weakness also pulled Korean stocks lower, after they briefly headed for a bull market amid foreign demand for the nation’s chipmakers.
  • Oil edged lower, extending its biggest decline in four weeks as weaker-than-expected economic data from China added to concerns of weaker demand. West Texas Intermediate fell below $69 a barrel Wednesday after settling 4.4% lower Tuesday. China’s manufacturing activity contracted at a worse pace than in April, raising a fresh signal the post-Covid rebound has lost momentum in the world’s biggest crude importer. The US dollar also rose, making commodities priced in the currency more expensive for international investors. Oil is down about 15% this year as concern about China’s economic recovery and tighter monetary policy from the Federal Reserve weighed on the demand outlook. Wrangling over the US debt ceiling has added to bearish sentiment, although progress has been made in recent days.
  • Gold steadied after edging higher on Tuesday, as investors assess the possible impact of a US debt-ceiling deal that could cut spending further. Bullion is down almost 2% this month, erasing gains made earlier in May when it surged to a near-record on fears of a US default. Those concerns have been largely alleviated as President Joe Biden and Republican House Speaker Kevin McCarthy expressed confidence that lawmakers will pass legislation in time to avert such a scenario. Spot gold declined 0.2% to $1,956.17 an ounce as of 10:11 a.m. in London. The Bloomberg Dollar Spot Index rose 0.4%. Silver was steady, while palladium and platinum declined.
  • Mexican Coca-Cola bottler Femsa sold about €3.3 billion of its shares in the Heineken Group, divesting its stake in the Dutch brewer as it plans to focus on its main businesses. Shares of Heineken NV dropped as much as 3% Wednesday morning, while Heineken Holding NV fell 0.9%. Femsa’s board of directors in February approved a plan to get rid of its Heineken investment, which it no longer considered an essential part of its strategy. The Mexican company is the largest convenience retailer in Latin America, operating about 20,000 stores and more than 3,600 pharmacies across the region. Heineken NV said Wednesday it bought €333 million worth of the stock. The Dutch brewer said it expects its purchase to boost its earnings per share.
  • Romanian utility giant Hidroelectrica SA is looking to the country’s $22 billion pension pot as it seeks to pull off one of the biggest-ever listings of a European renewable energy company.  Hidroelectrica is seeing strong initial interest from local retirement money for the IPO, which could raise an estimated €2 billion ($2.1 billion) or more, according to people with knowledge of the matter. It’s considering offering a dividend yield of 10% to 12% to lure buyers, the people said, asking not to be identified because the information is private. The share sale may attract at least €1 billion of demand from domestic pension investors, estimated Mihai Bratfalean, an equity portfolio manager at Aegon’s Romanian pension arm. With Hidroelectrica expected to immediately have a major weighting in Bucharest’s benchmark index, most might inflate their orders to ensure they get enough stock, Bratfalean said.
  • US mortgage rates surged to the highest level since early November last week when debt-ceiling talks were still at an impasse, stifling demand for home purchases and refinancings. The contract rate on a 30-year fixed mortgage increased 22 basis points to 6.91%, according to Mortgage Bankers Association data out Wednesday. That was through the week ended May 26, before the White House and Republican negotiators struck an agreement to raise the debt ceiling that’s now pending congressional approval. Since then, Treasury yields have been falling as traders grow hopeful that lawmakers will finalize a deal and avert a US default. If sustained, that could lower mortgage rates come next week.
  • The debt-limit deal struck by President Joe Biden and Speaker Kevin McCarthy is heading toward a vote Wednesday in the House of Representatives after clearing a crucial procedural hurdle with just days remaining to avoid a US default. Legislation to suspend the US borrowing ceiling for a period and cap federal spending was advanced by the House Rules committee Tuesday night on a 7-6 margin, sending it to a vote on final passage by the full House. Congress is racing to pass the measure before June 5, the date when Treasury Secretary Janet Yellen has warned the US risks default. Yet leaders in both parties face members who oppose concessions made by negotiators in the compromise unveiled over the weekend.
  • Johnson & Johnson’s first jury trial in nearly two years over allegations that its talc-based baby powder causes cancer could influence plaintiffs weighing the $8.9 billion settlement offer put forth by the company last month. The trial in Anthony Hernandez Valadez’s suit alleging he got mesothelioma from asbestos-contaminated talc in J&J products is scheduled to go before a jury Wednesday in state court in Oakland, California. Due to Valadez’s failing health, the case was allowed to proceed as an exception to the order putting all litigation on hold after J&J sought to wall off all of its talc liability in a Chapter 11 bankruptcy for its LTL Management unit. J&J, which is trying to settle more than 40,000 talc cases in the bankruptcy, must convince 75% of plaintiffs to back its settlement offer. The company is hoping the Chapter 11 halt to most jury trials will help it build support for the deal. But a big award for Valadez could convince more plaintiffs to go to trial, potentially tanking the deal.
  • WE Soda, the world’s largest producer of natural soda ash, unveiled plans for a listing on London’s main bourse, injecting life into a market that has been struggling to attract new listings. The company’s controlling shareholder, Turkish industrial conglomerate Ciner Group, will sell shares in the initial public offering, according to a statement. At least 10% of the share capital will be available for trading, in line with new London listing rules. WE Soda may seek a valuation of about $7.5 billion, based on its earnings and traded peers, according to people familiar with the matter. The final amount will also depend on market conditions, they said.
  • French inflation eased more than anticipated, reaching its lowest level in a year in a boost to those at the European Central Bank who say interest-rate increases can soon end. The measure of annual consumer-price changes in the euro zone’s second-largest economy softened to 6% in May from 6.9% in April, data Wednesday showed. That’s a sharper slowdown than the 6.4% gain economists surveyed by Bloomberg had estimated. The result reflects softening price gains across sectors, particularly in energy. Manufactured goods and services inflation, which are keenly watched by ECB officials, also moderated to 4.1% and 3%, according to the Insee statistics agency.
  • Jamie Dimon said JPMorgan Chase & Co. will be in China in both good and bad times, remaining committed to doing business in the Communist Party-ruled nation as political tensions grow. Echoing comments made by US officials, the chief executive officer of the largest US bank said on Wednesday that he doesn’t foresee a decoupling between the West and China, while acknowledging that the situation is “far more complex now.” “Over time there’ll be less trade,” Dimon said in a Bloomberg Television interview at the bank’s annual Global China Summit in Shanghai. “It’ll take years for this thing to take place, but it won’t be a decoupling and the world will go on.”
  • Franklin Resources Inc. is buying Putnam Investments from its Canadian owners in a consolidation of two asset managers that have struggled to find growth.  Franklin will initially pay $925 million in cash and stock to pry Putnam from Great-West Lifeco Inc., which is a part of the Desmarais family’s Power Corp. of Canada group. The deal also includes as much $375 million in contingent payments tied to revenue growth from a partnership between the two sides, Franklin Templeton said in a statement Wednesday. Great-West, one of Canada’s largest life insurers, will have a 6.2% stake in Franklin, most of which it will be locked up five years.