May 5, 2022

Daily Market Commentary

Canadian Headlines

  • Canadian stocks staged a turnaround from earlier losses, following a rally in U.S. markets after the U.S. Federal Reserve said that it will likely maintain rate increases of 50 basis-point for the “next couple of meetings.” The S&P/TSX Composite rose for the second day, climbing 1.3%, or 279.67 to 21,184.95 in Toronto. The index advanced to the highest closing level since April 22. Canadian National Railway Co. contributed the most to the index gain, increasing 3.1%. Paramount Resources Ltd. had the largest increase, rising 12.0%.
  • BHP Group Ltd. is looking at ways to speed up development of a $5.7 billion potash project in Canada at a time when creaking supply chains are pushing up crop nutrient prices. BHP Group President Minerals Americas Ragnar Udd was in Saskatchewan, Canada, last week evaluating acceleration options, although he said those efforts reflect solid long-term prospects and that any savings would be months not years. BHP approved the first stage of construction of Jansen in August after years of wavering over the huge price tag. The operation, expected to start production in 2027, will make it one of the world’s top producers of the crop nutrient. Since then, fertilizer prices have surged amid supply chain frictions that have been exacerbated by Russia’s invasion of Ukraine.

World Headlines

  • European shares jumped amid investor relief that the Federal Reserve took bigger rate hikes off the table. The Stoxx Europe 600 Index gained 1.3% by 12:09 p.m. in London, paring an  earlier advance of as much as 1.8%. Technology and real estate outperformed, while insurance stocks came under pressure. Shell Plc rose after posting its highest quarterly earnings on record. Airbus SE climbed after results. UniCredit SA gained on higher-than-expected revenue and lower operating costs.  European equities have been under pressure this year due to concerns about monetary tightening, surging inflation and economic risks from the war in Ukraine. Investors were reassured when on Wednesday Fed Chair Jerome Powell pushed back against a larger 75 basis-point increase.
  • A relief rally showed signs of flagging as inflation concerns resurfaced even after the Federal Reserve raised rates by half a point to rein in runaway price growth. U.S. equity futures signaled a pause following the S&P 500 index’s biggest daily advance since 2020 after Jerome Powell eased worries that the central bank would ratchet up rates more steeply. S&P 500 futures dropped 0.5%, while Nasdaq 100 contracts fell 0.6%. The dollar bounced and Treasury yields steadied. A global wave of monetary tightening is also seen as a threat to economic growth. In Europe, German factory orders plummeted, highlighting the toll from the war. European Central Bank Executive Board Member Fabio Panetta said economic expansion has almost ground to a halt in the euro area.
  • Asia’s stock benchmark rose, poised to snap a three-day decline, as the Federal Reserve’s policy announcement calmed fears about super-sized hikes. The MSCI Asia Pacific Index climbed as much as 1.2% before paring gains to around 0.4%. Tech and materials were the biggest boosts to the Asia gauge as most sectors rose, with TSMC and Infosys hauling up the measure. Bucking the trend, China’s stock gauge closed lower after a three-day holiday in a sign that Beijing’s vow to boost growth has failed to alleviate concerns over the outlook.
  • Oil pared gains before an OPEC+ meeting on supply strategy, after earlier stretching an advance that followed the European Union’s announcement Wednesday of a phased ban on Russian imports.  West Texas Intermediate was little changed above $107 a barrel after closing up 5.3% on Wednesday. The EU plans to ban Russian crude over the next six months and refined fuels by the end of the year, to increase pressure on President Vladimir Putin over his invasion of Ukraine. The bloc is also targeting insurers in a move that could dramatically impair Moscow’s ability to ship oil around the world. OPEC+ will likely ratify another modest production increase when members gather later Thursday, with the threat to demand in China from anti-virus lockdowns offering another reason for caution. Still, there are signs that a lack of capacity is hobbling the group’s ability to deliver even small increases.
  • Gold extended gains from near a two-month low on signals that the U.S. Federal Reserve’s monetary tightening won’t be as steep as many investors were anticipating. The precious metal rose as much as 1.2% after closing 0.7% higher in the previous session. The U.S. central bank raised its benchmark rate by half a percentage point on Wednesday, but Chair Jerome Powell said the Fed isn’t actively considering a bigger 75-basis-point rate hike in the near future. Powell said only 50 basis-point increases were being considered for the next couple of meetings, surprising some investors who had been expecting the Fed would opt for a three-quarter point move in June. Higher interest rates typically weigh on non-interesting bearing bullion.
  • Wheat headed for the first back-to-back advance in three weeks on weather concerns across global growers and as India considers restricting exports.  Extreme heat has hurt the harvest in India, where shipments have been booming in the wake of the war in Ukraine. That’s spurring the country to mull export restrictions, Bloomberg reported Wednesday. Wheat futures rose as much as 2.7% to $11.06 a bushel on the Chicago Board of Trade, nearing a one-week high. In Paris, milling wheat futures also climbed for a second session
  • Elon Musk has secured about $7.1 billion of new financing commitments for his proposed $44 billion takeover of Twitter Inc., winning the backing of some of the world’s largest investors.  The commitments come as the Tesla Inc. billionaire marshals capital to bankroll one of the biggest tech industry takeovers. The investors named in the filing on Thursday include crypto exchange Binance, Brookfield, Fidelity Management & Research, and Qatar Holding. Musk has also won the support of fellow entrepreneur and Oracle Corp. co-founder Larry Ellison, who has a big stake in Tesla and a seat on its board. Ellison’s trust has committed $1 billion to finance Musk’s takeover. The world’s wealthiest person reached an agreement on April 25 to acquire Twitter using a financing plan that’s alarmed some Tesla investors. In addition to pledging tens of billions of dollars worth of his Tesla shares to support margin loans, Musk vowed to line up some $21 billion worth of equity. It’s been unclear how much of that would come from selling a portion of his Tesla stake. Musk has sold more than $8.5 billion of Tesla stock to finance the deal.
  • Shopify Inc. missed analysts’ estimates for revenue and profit and announced a $2.1 billion deal for startup Deliverr, the largest acquisition in its history.  The Canadian e-commerce software firm reported adjusted earnings of 20 cents per share, far short of analyst calls for 64 cents, according to data compiled by Bloomberg. Revenue rose 22% to $1.2 billion from a year earlier, but couldn’t meet analyst expectations of $1.25 billion. E-commerce stocks have been pummeled this earnings season, fueling analyst concerns that online shopping is slowing from its torrid pace in the pandemic. Inc. suffered the biggest one-day dropsince July 2006 after it reported a weaker-than-expected revenue forecast. Etsy sunk in post-market trading on Wednesday after reporting second quarter revenue that missed average analyst expectations.
  • Shares of Hangzhou Hikvision Digital Technology Co.tumbled 10% as the U.S. considers imposing new sanctions on surveillance-technology giant, potentially the harshest measures so far against a major Chinese company. The Biden administration is weighing whether to add the maker of cameras and surveillance systems to its Specially Designated Nationals and Blocked Persons List, according to people familiar with the situation. The sanctions would be related to alleged human-rights violations by China against Muslim minorities in its far-Western region of Xinjiang. A final decision is unlikely this month, said one of the people, who declined to be identified as a decision isn’t finalized. Hikvision was already blacklisted by the U.S. in 2019 along with seven other Chinese technology giants, making it more difficult for it to do business with American companies. But the more severe sanctions under consideration would not just bar Americans from doing business with the company but also make its global customers potential targets of U.S. action.
  • Federal Reserve Chair Jerome Powell assured Americans that policy makers will do what it takes to curb surging inflation, acknowledging this could cause “some pain” as the U.S. central bank deployed its most powerful policy tightening in decades. The Fed on Wednesday raised interest rates by 50 basis points for the first time since 2000 and Powell said similar moves were on the table for June and July. Still, investors took heart that he also pushed back against a larger 75 basis-point increase, with stocks enjoying their largest rally on the day of a Fed meeting in a decade. Fed officials — who also decided to start reducing their holdings of Treasuries and mortgage-backed securities next month — are trying to curb the hottest inflation since the early 1980s. Back then, Chair Paul Volcker raised rates as high as 20% and crushed both inflation and the broader economy in the process.
  • Shell Plc posted its highest quarterly earnings on record, as the company was buoyed by high oil and gas prices despite taking a $3.9 billion accounting charge on its planned exit from Russia. The last of the supermajors to report first-quarter results, Shell followed the overall pattern set by its peers. The London-based company surpassed even the highest analyst estimate as extreme volatility in the energy markets helped its trading division to boost earnings. The surging profits prompted renewed calls from activists for a windfall tax. U.K. Prime Minister Boris Johnson already appeared to rule out such a policy, saying it would discourage vital investment in domestic energy supplies.
  • Italy renewed its call on the European Union to provide more detailed guidance on how natural gas buyers can pay for Russian supply without breaching sanctions. Governments across Europe want clarity from the EU on what companies can and can’t do under sanctions rules to address Russia’s demands for gas payments in rubles. With the next tranche of funds due to be transferred later this month, there’s mounting concern that failure to meet Vladimir Putin’s terms could prompt Moscow to cut off supplies to more countries. Moscow cut off gas supplies to Poland and Bulgaria last week for refusing to comply with its new order. Simson on Monday called the move “an unjustified breach” of contracts and “a warning that any member state could be next.” She said the EU would provide more detailed guidance in the coming days.
  • European banks are counting the rising cost of Russia’s invasion of Ukraine as they prepare for a wave of defaults that several fear will spread to the wider economy. Led by Italy’s UniCredit SpA, the industry has ratcheted up the amount of cash set aside to cover doubtful loans by the most in over a year. Alongside trading losses, writedowns and costs to exit the country, European lenders have so far flagged a hit of about $7 billion — with the potential for more to come. The economic impact of the war is already cascading across the world as commodity prices spike and corporate supply chains are disrupted. After years of benefiting from rapid growth in Russia, European banks are now asking themselves if it’s still worth doing business in the world’s most sanctioned country. At the same time, they’re also divided on how broad the damage to the economy will be, meaning some banks face further costs if defaults spike.
  • Europe’s biggest airlines are growing increasingly confident that the easing of coronavirus restrictions will kick off a summer boom as a surge in bookings spurs them to lift capacity. Deutsche Lufthansa AG and Air France-KLM are less certain about prospects going deeper into the year, with the German company saying Thursday that fuel prices are tough to predict and that it’s not clear how far increasing household costs will weigh on demand. Both carriers reported a strong start to 2022 after the impact from the omicron variant of Covid-19 quickly faded. Lufthansa said that demand has “recovered faster and stronger than expected in recent weeks,” while Air France-KLM Chief Executive Officer Ben Smith said that corporate and premium sales have begun to revive, following an already strong upward trend in leisure demand.
  • Agrochemicals company Syngenta Group (HK) Holdings Co. has completed Asia’s biggest-ever sustainability-linked loan, coming as the global market for such debt has slowed sharply this year. The maker of genetically modified seeds has entered into a $4.5 billion 3-year syndicated loan, it said Thursday.  The initial size of the deal was several times oversubscribed, according to Syngenta, which also called the term-loan facility the largest of any kind in the Greater China region this year. The firm had previously intended to borrow $1.5 billion with a possible $1 billion increase, Bloomberg News reported in March.  The global volume of sustainability-linked loans (SLLs), which tie interest rates to corporate sustainability targets, has fallen nearly 40% this year as inflation drags down fixed-income markets, according to data compiled by Bloomberg. But activity this year is on pace to top 2021 levels in Hong Kong, where Chinese firms have been syndicating such loans.
  • Germany signed contracts to charter four floating terminals to import liquefied natural gas in partnership with utilities RWE AG and Uniper SEas it races to reduce its energy dependence on Russia. Shipping companies Hoegh LNG and Dynagas will each provide two of the LNG terminals — which together have the capacity to convert at least 20 billion cubic meters of the super-cooled gas per year, about a fifth of Germany’s needs, the economy ministry said Thursday in an emailed statement. RWE and Uniper will operate them, it added. European countries are seeking to rapidly diversify their energy supplies to punish Russia over its invasion of Ukraine. Moscow last month unexpectedly cut off gas shipments to Poland and Bulgaria due to a payments dispute, underscoring the urgency of the task of reducing dependence on Russian fossil fuels.
  • Verizon Communications Inc. is considering raising prices for wireless service — one of several possible options to pass along inflation-related costs to consumers following AT&T Inc.’s decision this week to increase rates on older calling plans by $6 or more. An increase like AT&T’s isn’t likely for Verizon, but alternatives such as the introduction of a higher-priced unlimited plan or added fees are among the possibilities, according to a person with knowledge of the company’s deliberations. Either way, if costs keep rising, Verizon customers will see higher monthly bills. A Verizon representative declined to comment. The company’s shares were little changed in early trading at 7:40 a.m. New York time while U.S. stock futures slid.
  • Sens. Elizabeth Warren of Massachusetts and Tina Smith of Minnesota raised questions about a plan by Fidelity Investments to let investors put bitcoin in their 401(k)s in a letter to the company’s chief executive, arguing that crypto might be too risky an investment for retirement savers. In the letter dated Wednesday, the two Democrats also said Fidelity has potential conflicts of interest. The letter asked for information on the extent to which those potential conflicts might have affected the decision to offer bitcoin. Ms. Warren and Ms. Smith said Fidelity might have a conflict offering bitcoin in retirement funds because it has mined bitcoin and offers a crypto fund for wealthy investors. The comments echo recent statements from senior officials at the Labor Department, which regulates employer-sponsored retirement plans. Fidelity has embraced crypto in recent years and said that there has been customer interest in making the digital assets available in retirement plans.
  • Gucci will accept payments in cryptocurrencies in the U.S. starting this month, as the luxury industry takes tentative steps into the digital-asset universe.  Customers in some stores in New York, Los Angeles, Miami, Atlanta and Las Vegas will be able to pay using digital tokens from the end of May, the Italian fashion house said in a statement. It will adopt this payment option throughout its North American stores this summer. Gucci, owned by Kering SA, will initially accept 10 cryptocurrencies including Bitcoin, Bitcoin Cash, Ether, Dogecoin and Shiba Inu.

“If you can do what you do best and be happy, you’re further along in life than most people.” —Leonardo DiCaprio

*All sources from Bloomberg unless otherwise specified