May 4, 2023

Daily Market Commentary

Canadian Headlines

  • Toronto-Dominion Bank and First Horizon Corp. have agreed to terminate their previously announced merger amid uncertainty about the possibility of regulatory approvals. The lenders said in a statement Thursday that they “entered into a mutual agreement” to terminate their 2022 merger. TD will make a $200 million cash payment to Memphis-based First Horizon, on top of a $25 million reimbursement due as part of the merger agreement. The move is a reversal of TD’s push into the US, at a time when the nation’s regional banks are being roiled by deposit outflows and investor caution after a series of smaller firms collapsed. Banking indexes have fallen more than a third since the deal was first agreed. Shares in First Horizon almost halved on the news in early trading.
  • Shopify Inc. cut jobs for the second time in less than a year and agreed to sell the majority of its logistics business to Flexport Inc. as it faces a challenging climb back from last year’s slump. “I don’t want to bury the lede: after today Shopify will be smaller by about 20% and Flexport will buy Shopify Logistics; this means some of you will leave Shopify today,” Chief Executive Officer Tobi Lütke said in a memo to staff. “I recognize the crushing impact this decision has on some of you, and did not make this decision lightly.” Revenue for the period came in at $1.51 billion, beating the $1.43 billion average estimate of analysts surveyed by Bloomberg. Gross merchandise volume, the total value of merchant sales across Shopify’s platforms, was $49.6 billion, above Wall Street projections of $47.68 billion. The Ottawa-based company also gave an outlook for the second quarter, saying it expects revenue to grow at a similar rate to the first quarter growth rate on a year-over-year basis. It also expects to achieve free cash flow profitability for each quarter of 2023.

World Headlines

  • European shares dropped on another busy day for earnings, while investors awaited the European Central Bank’s policy decision after the Federal Reserve hiked rates as expected. The Stoxx 600 was down 0.5% at 9:13 a.m. in London after earlier hitting the lowest in a month. Automakers, media and health care sectors trailed. A technical glitch delayed the dissemination and calculation of indexes including the Stoxx 600 and the Euro Stoxx 50, according to index operator Qontigo. A rally in Europe’s benchmark index has faltered since the start of the first-quarter earnings season amid worries about a potential US recession. The next catalyst for stocks could come from signals by central banks on the path of rate hikes. After the Fed raised rates by 25 basis points on Wednesday, focus today will be on the ECB’s meeting, with economists expecting a similar move.
  • Contracts on the S&P 500 edged lower, with PacWest Bancorp leading a plunge in US regional lenders in premarket trading after saying it’s in talks with several potential investors. Markets are kicking off the month with rate decisions from two major central banks amid lingering concerns about financial stability and price pressures.
  • Asian stocks climbed as the dollar weakened on bets the Federal Reserve will pause interest-rate hikes, while Chinese shares ended flat as traders returned from the Golden Week holiday. The MSCI Asia Pacific Index advanced as much as 0.6%. The Fed hinted the latest hike could be the last one in its policy decision Wednesday, although pushed back against market expectations of rate cuts this year. Utilities and energy shares led broad-based gains. Onshore China stocks pared losses to close little changed as trading resumed following the Golden Week holidays. Concerns remain about the pace of China’s economic rebound despite strong holiday spending figures, as data showed factory activity struggled in April. Benchmarks in Hong Kong led gains in the region after falling in the previous session.
  • Oil futures steadied after enduring a roller-coaster ride at the start of trading in Asia, collapsing to the lowest level since December 2021 in a chaotic opening spell before erasing losses. West Texas Intermediate futures initially tanked by as much as 7.2% at the start the session as Chinese traders returned after a break and investors confronted concerns that a looming US recession would hurt demand. The steep drop was pared, then overturned by mid-morning in Asia. Crude has slumped about 14% this year, showing that a plan by the Organization of Petroleum Exporting Countries and its allies to regain control of the market by cutting output from this month isn’t yet working. The losses have been driven by concerns that global growth is slowing, potentially hurting energy demand.
  • Gold steadied after jumping to the highest in more than a year as a combination of the Federal Reserve likely pausing interest-rate hikes and mounting risks in the US economy spurred demand. Bullion jumped as much as 1.2% to levels not seen since Russia invaded Ukraine in early trading, before paring gains. The precious metal is still within range of its all-time high of $2,075.47 an ounce reached in August 2020 as the coronavirus wracked the global economy. Spot gold declined 0.3% to $2,033.49 an ounce as of 9:27 a.m. in London after jumping 1.1% on Wednesday. It touched $2,062.99 earlier, the highest intraday level since March 2022. The Bloomberg Dollar Spot Index fell 0.1%. Silver and platinum declined, while palladium gained.
  • PacWest Bancorp said core deposits have increased since March and confirmed it’s in talks with several potential investors, seeking to calm markets after a 60% stock rout that made it the new focal point of concern over the health of US regional lenders. “The bank has not experienced out-of-the-ordinary deposit flows following the sale of First Republic Bank and other news,” PacWest said in a statement dated Wednesday. “Our cash and available liquidity remains solid and exceeded our uninsured deposits.” The turmoil at PacWest shows how investor angst still remains elevated after a string of failures and deposit outflows in the sector despite Federal Reserve Chair Jerome Powell’s assurance Wednesday that authorities were closer to containing the crisis. It’s reignited the debate over whether more US regional lenders will fall after this year’s collapse of SVB Financial Group’s Silicon Valley Bank, Silvergate Capital Corp., Signature Bank and most recently First Republic Bank.
  • Johnson & Johnson’s consumer health business Kenvue Inc. raised $3.8 billion in an upsized initial public offering that is the biggest US listing since 2021. Kenvue’s IPO price of $22 per share, which confirmed an earlier Bloomberg News report, is in the top half of the company’s marketed range of $20 to $23 each. The company also expanded the number of shares it’s selling to 172.8 million from 151 million, according to a press release, giving Kenvue a market value of more than $41 billion. Kenvue’s products include dozens of J&J brands that are household names, including Tylenol, Listerine, Neutrogena and Nicorette. On a pro forma basis, the business had net income of about $1.5 billion on sales of almost $15 billion for the year ended Jan. 1, according to its filings.
  • Anheuser-Busch InBev NV, the world’s largest brewer, reported profit growth that beat analysts’ estimates on the strongest pricing in at least a decade. First-quarter adjusted earnings climbed 14% to $4.8 billion, said the brewer, whose Bud Light brand got caught up in a marketing controversy last month. Volumes returned to growth after a dip in the fourth quarter of 2022. Brewers ranging from Heineken to Carlsberg have been raising prices to offset higher costs for aluminum, energy and grains. AB InBev boosted pricing by 12% in the quarter and its premium beers outperformed. In April, Bud Light suffered a backlash in the US over an advertising campaign with transgender social-media influencer Dylan Mulvaney, which may weigh on second-quarter sales.
  • Russia underlined its commitment to cut crude production and said reports of growth in oil tanker flows fail to account for a significant reduction in pipeline shipments. Piped deliveries to European clients have dropped by more than two-thirds and the drop “was only partly compensated by seaborne exports,” Deputy Prime Minister Alexander Novak said in a statement. “Russia confirms its full commitment to and implementation of voluntary oil-output cuts.” Russia, a top global oil producer, vowed to lower its crude output by 500,000 barrels a day in March and maintain that reduction through the rest of the year. However, the nation classified its oil-production data, making it increasingly difficult to assess Russia’s adherence to the cuts.
  • Russia claimed the US was behind a drone strike on the Kremlin early Wednesday that it has blamed on Ukraine, but provided no evidence for either assertion. Ukraine has denied any responsibility, dismissing the Russian allegations, as did the US. “I can assure you there was no involvement by the United States,” National Security Council spokesman John Kirby told MSNBC Thursday. ”Whatever it was, it didn’t involve us.”  No one was hurt in the attacks and damage was limited to two copper panels on the dome of the Kremlin’s Senate Palace, where President Vladimir Putin’s office is located, according to spokesman Dmitry Peskov. Security will be tightened after the incident, he said, without providing details.
  • Volkswagen AG beat expectations for the first quarter, thanks to rising deliveries and strong demand in the US and Europe that helped offset a slide in sales in China.  First-quarter operating profit declined to €5.7 billion ($6.3 billion), Europe’s biggest carmaker said Thursday. That compares with an average analyst forecast of €5.5 billion. Last year’s result was inflated by a surge in value of the company’s nickel hedges. VW confirmed its outlook, banking on a high order book of 1.8 million vehicles, Chief Financial Officer Arno Antlitz said in a statement. The strong start to the year chimes with rivals such as Stellantis NV and Ford Motor Co., while staying cautious on the year ahead.  As conditions soften, automakers are facing up to the prospect of sagging vehicle prices while still working down orders accumulated during long months of supply-chain disruption. Returns have so far remained firm, but a subdued global economy and high inflation hitting buyers in the mass-market segment is starting to weigh. Aggressive EV price cuts by Tesla Inc. are also adding pressure.
  • British households and businesses pulled almost £11 billion ($13.8 billion) out from banks in March as panic spread from the collapse of Silicon Valley Bank and the takeover of Credit Suisse Group AG. Households took out almost £5 billion from bank accounts in the first decline in deposits in almost five years, Bank of England data showed Thursday. Business deposits also fell £5.8 billion, the sharpest drop since last June. The figures suggest there was some minor contagion to the UK after the banking sector was rocked by crises on both sides of the Atlantic. Central banks have insisted that their banking systems are sturdy, but signs of turbulence in the US continued this week with the sale of First Republic Bank and a plunge in PacWest Bancorp shares.
  • Goldman Sachs Group Inc.’s role in Silicon Valley Bank’s attempt to raise funds in March is under review by US governmental agencies, which are looking into the failed transaction that helped push the US regional-banking system into turmoil. The Wall Street titan is cooperating and providing information to the government in connection with their investigations and inquiries into Silicon Valley bank, including the role the firm played with the now-failed bank in March, according to a regulatory filing. SVB offloaded a $24 billion portfolio to Goldman at a loss and sought the firm’s help in raising more than $2.2 billion to cover the shortfall, according to disclosures in March. Goldman couldn’t pull off the deal and a bank run in the wake of that offering effectively doomed SVB.
  • Apollo Global Management Inc. agreed to acquire equipment and parts manufacturer Arconic Corp. for about $3 billion. The buyout firm will pay $30 a share for the Pittsburgh-based company, according to a statement Thursday. That’s a premium of 36% to the closing price on Feb. 27, before the Apollo interest was reported. Founded in 1888, Arconic manufactures aluminum sheets and plates for companies across the aerospace, automotive and commercial transportation markets. The company, which is scheduled to report first-quarter earnings on today, generated almost $9 billion in sales for 2022.
  • President Joe Biden has picked Federal Reserve Governor Philip Jefferson for a promotion to vice chair and will nominate economist Adriana Kugler to an open board slot, according to people familiar with the matter. The selections could be announced as soon as Friday, two of the people said, speaking on condition of anonymity to discuss private talks. A White House spokesperson declined to comment. If confirmed by the Senate, Kugler — currently the US representative to the World Bank — would be the central bank’s first Latina policymaker in its 109-year history and would fill a governor vacancy left by the departure of Lael Brainard, who in February became the director of Biden’s National Economic Council.
  • The European Union’s economy chief stressed that governments need to provide targeted public support to keep the bloc competitive in the face of inflation and public debt.  Commissioner Paolo Gentiloni pointed out that government help during the Covid-19 pandemic was unavoidable, and more will be needed to keep Europe competitive in the race to develop clean technology. “We should start from the fact that public intervention will have a stronger role than in the past — this is inevitable,” Gentiloni said at the Brussels Economic Forum on Thursday. “But part of this green tech race — that is going on all over the world — is supported by governments, and I think this dimension needs to be there at national and European level.”
  • Six weeks since the deal to rescue Credit Suisse Group AG was rushed through, at least 120 claims have been filed against the Swiss banking watchdog’s decision to wipe out about $18 billion worth of its high-risk bonds as part of the deal.  As of May 2, the claims represent around 1,300 individual bondholders, according to a spokesman for the Swiss Federal Administrative Court. Claimants focused on a notional deadline to file of May 3. Created after the 2008 financial crisis, AT1s are the lowest rung of bank debt, producing juicy returns in good times but taking the first hit when a bank runs into trouble. The risk of a write down to zero was included in the fine print of the Credit Suisse AT1 brochure.
  • Peloton Interactive Inc. gave an upbeat quarterly revenue forecast, signaling that a turnaround plan under Chief Executive Officer Barry McCarthy is making headway despite the sluggish economy. The shares surged 8% in premarket trading. Sales will be $630 million to $650 million in the fiscal fourth quarter, the fitness company said in a statement Thursday. That compares with the $614.4 million predicted by analysts. The outlook helps renew optimism about a company that has struggled since an early-pandemic surge. Peloton’s stationary bikes had been a prized commodity during Covid-19 lockdowns, when cooped-up consumers sought out the equipment and binged on fitness classes. But demand dried up after people began heading back to offices and gyms, and the company found itself with a glut of inventory.