May 6, 2022

Daily Market Commentary

Canadian Headlines

• Telus reported Friday Q1 adjusted earnings of CA$0.30 ($0.23) per share, compared with CA$0.27 a year ago. The company said Q1 revenue was CA$4.28 billion, up from CA$4.02 billion last year. The company also reiterated its full-year guidance of 8% to 10% growth in revenue and adjusted EBITDA, and CA$1 billion to CA$1.2 billion in free cash flow. Telus announced a quarterly dividend of about CA$0.34 per share, over a 7% increase from last year, payable on July 4 to shareholders on record as of June 10.
• Millennial home buyers and the work-from-home trend will keep lumber demand robust despite surging inflation, according to major Canadian producer Resolute Forest Products Inc. The work-from-home trend is here to stay, and people who moved during the pandemic still want to do renovations, said Chief Executive Officer Remi Lalonde. In addition, the U.S. doesn’t have enough inventory to meet demand as millennials enter their prime years for purchasing a home, he said. Lumber prices have been volatile throughout the pandemic. They touched record highs last May during a homebuilding boom only to collapse as high prices stifled demand. Canfor Corp. said this week that new home construction will face increased headwinds as high inflation and rising interest rates make homes less affordable.

World Headlines

• European stocks extended losses on Friday, set for their worst weekly drop in two months following a major selloff on Wall Street yesterday, as concerns over a bleak economic outlook, soaring prices and rising bond yields kept sentiment shaky.  The Stoxx 600 Index dropped 1.4% by 10:38 a.m. in London, with consumer, retail and real estate among the biggest decliners. Energy outperformed as oil headed for its first back-to-back weekly gain since early March on signs the market is tightening as the European Union moved toward banning Russian crude.  The European equity benchmark hit a seven-week low on Thursday as initial euphoria sparked by the U.S. Federal Reserve’s decision to raise interest rates quickly soured as broader concerns over growth and inflation, and how central banks will maneuver in order to avoid a recession, took over investors’ attention. European equities have been under pressure this year due to concerns about monetary tightening, surging inflation and economic risks from the war in Ukraine.
• U.S. futures fell with bonds Friday as risk aversion and volatility gripped markets beset by inflation and growth fears.  Contracts on the S&P 500 and Nasdaq 100 pointed lower the day after a rout that slashed 3.5% off the S&P and 5% from the Nasdaq. Treasuries extended a tumble that’s lifted the benchmark yield past 3% and the dollar erased an early gain. The next pressure point for markets is Friday’s U.S. jobs report, which will be closely watched for signs that rising wage costs are adding to the inflationary pressures rattling investors. Estimates by economists are looking for payrolls to expand by 380,000 in April, and the unemployment rate to fall to 3.5%.
• Asia stocks were on track for five straight days of losses, as traders questioned whether the Federal Reserve’s interest rate hike was enough to tackle inflation and Chinese leaders warned against doubting their Covid-Zero stance. The MSCI Asia Pacific Index declined by as much as 1.8%, poised for its longest losing streak since January and lowest closing level since July 2020. The broad-based selloff followed steep declines in U.S. shares overnight, with benchmarks in Australia, Taiwan and Vietnam each declining more than 1.7%.
• Oil headed for its first back-to-back weekly gain since early March on signs the market is tightening as the European Union moved toward banning Russian crude and the U.S. said it would refill its strategic reserves. West Texas Intermediate rose toward $110 a barrel, up 5% this week. The EU intends to phase in a ban on Russian crude by year-end to punish Moscow for its invasion of Ukraine. The group has proposed a revision to the ban that would give Hungary and Slovakia an extra year to comply, people familiar with the matter said on Friday.  Approval requires support from all 27 states, and Hungary Prime Minister Viktor Orban said that he doesn’t want to veto the plan, while outlining his concerns and requesting a five-year exemption.
• Gold headed for a third straight weekly drop, its longest run of losses since December, as intensifying concerns over inflation spurred a rally in U.S. government bond yields. A selloff in long-end Treasuries has pushed 10-year yields firmly above 3%. That came after the U.S. Federal Reserve raised its benchmark rate by half a percentage point on Wednesday, but Chair Jerome Powell ruled out more aggressive increases. The less-hawkish than expected stance saw bullion rise as much as 1.5% earlier in the session before closing down 0.2%. The precious metal has been on a downward trajectory since mid-April on expectations the Fed will be forced to tighten monetary policy rapidly to combat consumer-price gains. The Bank of England warned of recession risks from double-digit inflation on Thursday, helping to boost the dollar. Higher bond yields typically weigh on non-interest bearing gold, while a stronger U.S. currency makes it relatively more expensive for some buyers.
• Corn futures headed for a weekly loss, their first since early April, as drier weather helps U.S. plantings rebound from their sluggish pace.  After a rainy start to spring, a warmer and drier break is likely across two-thirds of the U.S. Midwest for the next week, Commodity Weather Group said in a note. That could usher in “notable advances” in corn and soybean seeding, easing early worries about production for the coming season.  As of May 1, only 14% of U.S. corn had been sown, well behind the average pace. The status of the American crop will remain particularly in focus this year, as Russia’s invasion significantly curtails exports from Ukraine, one of the other leading shippers. Chicago futures fell 1.1% Friday, putting prices about 3% lower on the week.
• The European Union has proposed a revision to its Russia oil sanctions ban that would give Hungary and Slovakia an extra year, until the end of 2024, to comply, according to people familiar with the matter. The Czech Republic would also be granted an exemption until June 2024, the people said. All other member states would phase out their imports by the end of this year as originally proposed, with imports of crude halting in six months and refined petroleum products in eight months. Hungarian Prime Minister Viktor Orban said earlier Friday that he opposed the EU’s original proposal to ban Russian oil, saying it was tantamount to a “nuclear bomb” being dropped on his country’s economy. He said he wanted a five-year exemption on an oil ban after the EU originally proposed giving the country one extra year.
• A bird flu virus that’s sweeping across the U.S. is rapidly becoming the country’s worst outbreak, having already killed over 37 million chickens and turkeys and with more deaths expected through next month as farmers perform mass culls across the Midwest. Under guidance of the federal government, farms must destroy entire commercial flocks if just one bird tests positive for the virus, to stop the spread. That’s leading to distressing scenes across rural America. In Iowa, millions of animals in vast barns are suffocated in high temperatures or with poisonous foam. In Wisconsin, lines of dump trucks have taken days to collect masses of bird carcasses and pile them in unused fields. Neighbors live with the stench of the decaying birds.
• Citigroup Inc. is ramping up efforts to add 700 private bankers in coming years with the opening this week of two new private-banking offices in Paris and Frankfurt. The New York-based bank has begun relocating staff from its Luxembourg bureau to the new locations, which will be housed at existing offices in the two cities. Citigroup will increase headcount at both offices in coming months. Citigroup is doubling the number of advisers in its private-banking workforce as it seeks to deepen its foothold in the business of catering to the ultra-wealthy. The firm last year combined its private-banking and wealth-management divisions as part of Chief Executive Officer Jane Fraser’s plans to improve Citigroup’s returns.
• British Airways parent IAG SA reported worse-than-expected earnings and tempered plans to boost capacity after staffing shortages at London’s Heathrow airport slowed its U.K. expansion. Shares of IAG fell 12% Friday, the biggest drop in almost six months, after the company reported a first-quarter operating loss of 731 million euros ($769 million). Operations were hit by IT glitches together with the reduced growth at Heathrow as British Airways grappled with a requirement for 4,000 recruits. IAG now aims to provide 80% of its 2019 capacity in 2022, down from the 85% touted in February, providing a breathing space as it seeks to boost resilience at the Heathrow operation. Chief Executive Officer Luis Gallego said seating on key North Atlantic routes should still be close to normal by the summer peak.
• China’s property loan growth slowed to the lowest pace in over two decades due to the continued slump in the real-estate market brought on by developer defaults, virus lockdowns and weak consumer confidence. Outstanding loans in the property sector grew 6% to 53.2 trillion yuan ($8 trillion) at the end of March from a year ago, the slowest pace of expansion since data began in 2009, according to a statement released Friday by the People’s Bank of China. The growth rate was down from 7.9% at the end of 2021. Residents’ mortgages rose 8.9% to 38.8 trillion yuan from a year ago, slowing from the 11.3% increase at the end of last year, while outstanding property development loans grew after dropping for three straight quarters.
• For all the problems out there, investors can find solace in one thing: profit expectations are actually rising. Earnings keep beating expectations on both sides of the Atlantic, even if the breakneck pace of growth seen in the previous quarters has moderated. In fact, a Bloomberg Intelligence tally shows that the share of positive surprisesfor the S&P 500 Index has risen compared with the previous season, while the share of firms surprising on the downside has dropped, despite some historic flops, such as Amazon.com Inc. According to a Citigroup Inc. gauge that tracks the relative number of earnings-per-share upgrades and downgrades, estimates are rising again. And Europe — the region most exposed to the fallout from the war in Ukraine — leads the way. EPS and sales beats there are at the highest level in at least 10 years, according to Bank of America Corp.’s latest tally of the season so far.
• The global market selloff that saw the S&P 500 Index post its worst first four months of a year since 1939 has further to run, according to Bank of America Corp. Every asset class saw outflows in the week prior to the Federal Reserve’s meeting, with real estate posting its biggest outflow on record — $2.2 billion — and investors piling into safe havens like U.S. Treasuries, BofA said, citing EPFR Global data through Wednesday. The Nasdaq 100 Index tumbled 5.1% on Thursday, the most since September 2020, slumping along with most bond markets and unwinding the prior day’s post-Federal Reserve bounce. The wild two days for markets leaves the tech-heavy gauge down 21% for the year amid concerns about inflation, aggressive rate hikes and an economic slowdown.
• Boris Johnson’s Conservatives shed seats across England and lost three London strongholds, but the prime minister appears to have avoided the scale of disaster in Thursday’s local elections that might have triggered a fresh bid by members of his party to replace him. With more than half of councils reporting results, the U.K. governing party had lost about one in six of its seats. That is far from some of the more dire predictions ahead of the polls, which typically give voters the chance to lodge a mid-term protest against the government. Electoral Calculus had projected the Tories would lose about a third of their seats.
• Under Armour Inc. tumbled after its earnings report showed it’s struggling with supply-chain issues and pandemic-related shutdowns in China. Revenue is projected to rise 5% to 7% this fiscal year, the company said Friday in a statement. That includes about 3 percentage points of headwinds related to the decision to cancel orders affected by capacity issues, supply-chain delays and Covid in China. Under Armour expects earnings per share, excluding some items, to be in the range of 63 cents to 68 cents for the year ending next March
• Bitcoin slumped for the seventh time in eight days, raising concern that the slide risks pushing the largest cryptocurrency out of the range it has traded within much of the year.  Cryptocurrencies have been weighed down by the overall risk aversion that has swept though global markets as central banks battle inflation while trying to temper the stimulus added during the Covid pandemic. Bitcoin is down more than 20% so far this year.  “If risk sentiment continues plummeting, the chicken bones on the technical charts suggest Bitcoin could be on its way to $28,000 and then $20,000,” Jeffrey Halley, a senior market analyst at Oanda Asia Pacific, said in an email. “HODL on for dear life.”
• Global food prices held near a record as crop trade is disrupted by the war in Ukraine, exacerbating tight supplies and stoking inflation. Russia’s invasion has reduced exports from Ukraine to a trickle, curbing supplies from one of the world’s biggest grain and vegetable oil shippers. That’s sent buyers flocking elsewhere, while some nations are moving to restrict sales as they worry about depleting local reserves. High fertilizer prices and weather worries are adding to the threat for global crop supplies, including drought curbing the U.S. wheat crop. That risks compounding a deepening hunger crisis. A United Nations food index eased less than 1% in April, holding near an all-time high.
• Treasuries extended declines on concern that U.S. jobs data will show the Federal Reserve needs to be more aggressive with rate hikes to contain inflation.  U.S. 10-year yields rose four basis points to 3.07%, having closed above 3% for the first time since 2018 Thursday. European bonds also slid on expectations for rate hikes, pushing the premium for Italian debt over Germany above 200 basis points for the first time in two years. Long-dated Treasuries led declines as investors fretted inflation will get out of hand even with central banks raising policy rates and signaling further hikes to come.
• Hundreds of workers at a technology factory in China clashed with authorities and flooded past isolation barriers after weeks under lockdown, a stunning breakdown in the Communist Party’s efforts to contain Covid-19 infections. The Shanghai factory, which is owned by Taiwan’s Quanta Computer Inc. and makes devices for Apple Inc. among others, has been operating under tight restrictions since the beginning of April. In a video shared on Twitter and YouTube, workers rushed through barriers and tangled with guards in white protective gear who tried to keep them inside.
• Nine in 10 central banks are exploring the possibility of creating their own digital currencies, and more than half are already developing them or running experiments, according the Bank for International Settlements. Two-thirds of institutions in a BIS survey indicated that central bank digital currencies — or CBDCs — could be issued for retail purposes “in the foreseeable future,” researchers Anneke Kosse and Ilaria Mattei said in a report published Friday. The results highlight the urgency with which central banks have sought to keep pace with innovation amid the rising popularity of crypto assets and declining cash use, exacerbated by the pandemic. China, Nigeria, the Bahamas and some Eastern Caribbean islands are already issuing or piloting consumer-facing digital currencies.

*All sources from Bloomberg unless otherwise specified