November 10, 2022


Daily Market Commentary

Canadian Headlines

  • Brookfield Asset Management Inc.’s earnings declined as volatile markets weighed on valuations of its holdings of private assets. Net income fell to $716 million in the third quarter from $2.7 billion in the same period last year because of lower valuation and disposition gains, the Toronto-based asset manager said in a statement. Funds from operations, a more closely-watched metric for Brookfield, came in at $1.47 billion in the third quarter, slightly better than the $1.45 billion estimated by analysts in a Bloomberg survey. The private equity industry is contending with the toughest environment since the 2008 financial crisis as higher interest rates and persistent inflation paint a dark macroeconomic picture. Blackstone Inc., Carlyle Group Inc., and KKR & Co. reported faltering earnings as tumultuous markets ate into valuations and disrupted dealmaking.
  • Brookfield Asset Management Inc. led a A$18.4 billion ($11.8 billion) offer to acquire utility Origin Energy Ltd., its latest bid to add exposure to Australia’s accelerating shift away from fossil fuels. The deal, Asia’s third-largest announced acquisition this year according to data compiled by Bloomberg, is backed by Sydney-based Origin’s board. Brookfield said it aims to turn the energy generator and retailer — with around 4.5 million customer accounts — into Australia’s key provider of clean power. Under Brookfield’s plan, an additional A$20 billion will be invested by 2030 in Origin’s transition strategy, including adding more capacity in renewable power and energy storage, the fund said in a statement Thursday. The fund’s partner MidOcean Energy — a liquefied natural gas company owned by US-based EIG Global Energy Partners — will take control of the target’s natural gas assets, including a stake in the Australia Pacific LNG export operation.
  • Manulife Financial Corp. took a hit from continued pandemic-related restrictions that weighed on its Asia business, extending a patch of rocky results for the insurer in the region. Third-quarter core earnings in the Asia unit fell 3.8% from a year earlier to C$513 million ($379 million), the Toronto-based company said Wednesday in a statement. Manulife has faced a difficult macroeconomic environment in recent quarters, with measures intended to fight Covid-19 hurting its Asia business and plunging equity markets weighing on the wealth- and asset-management unit. Annualized premium equivalent sales in Asia fell 8.2% to C$854 million, hurt by lower sales in Hong Kong, which only recently began lifting Covid-related restrictions.

World Headlines

  • European stocks were steady on Thursday as investors brace for US inflation data as they attempt to gauge the extent of Federal Reserve policy tightening needed to tame price rises. The Stoxx Europe 600 index was little changed by 12:28 p.m. in London. Utilities rose, while health care was boosted by AstraZeneca Plc’s third-quarter earnings beat. Real estate and miners slipped. European stocks have risen about 10% since a September low as corporate earnings have come in stronger than expected, offering relief to investors fretting over hawkish central bank policies and the energy crisis.
  • US stock-index futures rose, while Treasuries slipped, as investors remained on the edge before a report projected to show inflation in the world’s largest economy moderated for a fourth successive month. December contracts on the S&P 500 and Nasdaq 100 added at least 0.3% each, a day after the underlying indexes tumbled to one-week lows amid a blurry midterms verdict and crypto-industry turmoil. Gen Digital Inc. jumped in New York premarket session as its earnings matched estimates. Treasuries fell, with yield curves bear-flattening. The dollar advanced, while oil extended its slide to a fourth day. Investors are looking for firmer signs of a peak in US inflation that could herald a slowdown in the pace and severity of the Federal Reserve’s monetary tightening. While economists forecast year-on-year headline inflation fell to 7.9% for October, traders remain cautious given the reading has repeatedly overshot projections this year. According to a scenario analysis by JPMorgan Chase & Co., the S&P 500 could rally more than 5% if the reading falls to 7.6% or below, but a higher-than-estimated figure would spark a 6% slump.
  • Asian equities dropped for a second day, as the turmoil in the crypto market and China’s Covid restrictions prompted a selloff ahead of key US Inflation data. The MSCI Asia Pacific Index fell more than 1%, with gauges in Hong Kong among the biggest decliners in the region. Consumer discretionary and tech shares fell the most. Shares linked to the crypto industry fell after Binance dropped its bid for, while China’s heavyweights face dwindling Singles Day sales. Risk-off sentiment prevailed in Asia trading on Thursday as investors awaited data on price increases in the US to gauge the Fed’s next policy move. Chinese stocks dropped as the nation strengthened Covid restrictions to curb an outbreak in a key manufacturing hub, dampening hopes of a reopening that triggered a rally this month.
  • Oil dipped ahead of US inflation figures that will provide clues about the prospects for the world’s largest economy, while China’s Covid Zero policy continues to weigh on the demand outlook. West Texas Intermediate slipped near $85 a barrel, pressured by a stronger greenback, making commodities price in the currency less attractive. China’s top leaders reiterated the need to stick to the nation’s Covid Zero policy, while urging more targeting measures to fight the virus. The country is now adding curbs in the southern manufacturing hub of Guangzhou,. After Brent crude rallied toward $100 earlier this week, prices have pulled back on concerns about the demand outlook. Still, futures have regained some ground this quarter after the Organization of Petroleum Exporting Countries and its allies agreed to reduce supply, and traders are now looking ahead to US inflation data due later.
  • Gold held its recent gains while copper edged lower, ahead of a US inflation report due later Thursday that could influence the size of the Federal Reserve’s next rate hike. Tighter US monetary policy makes non-yielding assets like commodities less attractive, which has weighed on metals throughout the year. Gold, copper and aluminum have all declined by more than 10% from levels reached in March.
  • The US Federal Trade Commission plans to make wider use of its 1914 founding statute to police anticompetitive behavior by companies in the internet age. The Democratic-led commission on Thursday issued a new policy statement that empowers the agency to prevent “unfair methods of competition.”  FTC Chair Lina Khan said the policy, which re-affirms Section 5 of the FTC Act, will effectively reactivate the FTC’s authority to police conduct, especially in online markets. The guidance will allow the agency to tackle behavior that traditional antitrust laws have had trouble addressing, for example when a series of acquisitions, each of which would appear fine on its own, represent an anticompetitive consolidation when combined. The agency has also used the statute to sue companies under its mandate to protect consumers from fraud, scams and misleading business practices.
  • Target Corp. is mapping out its next generation of stores near Houston, and this much is clear: the retail giant thinks bigger is better. The new store in Katy, Texas, covers almost 150,000 square feet, compared with the company average of about 130,000. The backroom space devoted to handling online orders for same-day pickup is five times larger than at stores of a similar size. Target is betting that this redesign will boost its strategy of using stores as fulfillment hubs for digital orders — an approach that gained ground during the pandemic. Next year, the retailer will incorporate elements of it into about 30 new locations and half its planned 200 remodels and then expand its use in 2024.
  • Brazil’s consumer prices rose more than expected in October, snapping a three-month deflation streak as President-elect Luiz Inacio Lula da Silva pushes plans to increase public spending. Official data released Thursday showed consumer prices rose 0.59% from September, above the 0.49% median estimate in a Bloomberg survey. Annual inflation eased to 6.47%.  Inflation in Latin America’s largest economy is gradually cooling after the central bank raised rates by 11.75 percentage points over a year and a half while President Jair Bolsonaro cut taxes on fuels and utilities. Going forward, his successor wants to make much of the current administration’s expanded social aid permanent, potentially risking more price pressures.
  • Crypto markets face weeks of deleveraging in the fallout from the crisis at digital-asset exchange, a period of upheaval that could push Bitcoin down to $13,000, according to JPMorgan Chase & Co. strategists. A “cascade of margin calls” is likely underway given the interplay between the exchange, its sister trading house Alameda Research and the rest of the crypto ecosystem, a team led by Nikolaos Panigirtzoglou wrote in a note. Digital-asset investors are still coming to terms with the rapid unraveling at and the concerns swirling around Alameda Research, both founded by 30-year-old Sam Bankman-Fried. There are fears that the potential bankruptcy of could lead to contagion that takes down other crypto outfits.
  • Americans were already unhappy with the economy of 2022. Republican control of the House threatens to make 2023 worse. The GOP is poised to win a majority of seats in the House of Representatives after this week’s midterm elections—albeit by a smaller margin than forecasters expected. That likely means less government support in the event the Federal Reserve’s steep interest-rate hikes trigger a recession as the cost of quashing the highest inflation in a generation. Not only that, but a fight over the federal debt limit risks making a potential downturn even deeper. “Ordinarily you would like to think that governments would be in a position to offer some assistance and support to households and businesses through very tough economic times,” says James Knightley, chief international economist at ING. “But given the partisan nature of politics, that seems highly unlikely to be achievable.”
  • The crisis engulfing Sam Bankman-Fried’s is rapidly worsening, with the onetime crypto wunderkind warning of bankruptcy if his firm can’t secure funds to cover a shortfall of as much as $8 billion. Bankman-Fried informed investors of the gap on Wednesday, shortly before rival exchange Binance abruptly scrapped a takeover offer. He said needed $4 billion to remain solvent and is attempting to raise rescue financing in the form of debt, equity, or a combination of the two, according to a person with direct knowledge of the matter. The acknowledgment of his firm’s deepening troubles and limited options is a stunning turn for Bankman-Fried, who was once worth $26 billion and likened to John Pierpont Morgan. It also underscores the uncertainty hanging over FTX, its clients and cryptocurrency markets.
  • Credit Agricole SA said its regional-bank shareholders would buy up to €1 billion ($1 billion) of the lender’s shares by the first half next year, in a move that takes advantage of depressed prices amid worries over the economic outlook.  The Paris-based bank said the regional lenders, through the holding entity SAS Rue La Boetie, would increase their stake to not more than 65% of its shares, instead of roughly 57% today. Credit Agricole made the announcement Thursday alongside mixed third-quarter results, in which net income beat expectations, while its CET1 ratio, a key measure of financial strength came in lower than expected. Given the undervaluation of European banks, the regional-bank owners are like “an astute shareholder,” investing in the lender on account of “its performance, its solidity and its development potential,” Chief Executive Officer Philippe Brassac said in a call with reporters.
  • Storm Nicole weakened after making landfall as a hurricane on Florida’s east coast, even as it continues to pummel the region with strong winds and a dangerous storm surge. The cyclone was downgraded to a tropical storm, with maximum sustained winds at about 70 miles (110 kilometers) per hour, according to an advisory from the National Hurricane Center at 4 a.m. local time. It’s centered over the east-central part of the state, about 60 miles southeast of Orlando. Still, strong winds are expected as far as South Carolina, and water levels could rise as high as 5 feet (1.52 meters) in some areas. Nicole, which is crawling west-northwest, could bring as much as 6 inches of rain to parts of the Southeast through Saturday.
  • US President Joe Biden vowed to make no “fundamental concessions” in his first in-person summit with China’s Xi Jinping, reinforcing already low expectations for any major breakthrough in strained ties between the world’s two largest economies. The two presidents are expected to meet next week on the sidelines of the Group of 20 summit in Bali, Indonesia. Xi’s last meeting with a US leader came in June 2019, when he reached a truce with Donald Trump that led to a trade deal six months later — right before relations fell into a downward spiral as Covid-19 spread around the globe. Biden said he expects to discuss contentious issues such as trade and Taiwan, which China has put under increased military pressure since US House Speaker Nancy Pelosi visited Taipei in August. His administration also imposed sweeping curbs on the sale of advanced chips to China, a move designed to maintain the US’s technological edge over Beijing.
  • New Twitter Inc. owner Elon Musk emailed his workers for the first time late Wednesday to prepare them for “difficult times ahead” and ban remote work unless he personally approved it. Musk said there was “no way to sugarcoat the message” about the economic outlook and how it will affect an advertising-dependent company like Twitter, according to the email reviewed by Bloomberg News. The new rules, which kick in immediately, will expect employees to be in the office for at least 40 hours per week, he added. Twitter has been under Musk’s leadership for close to two weeks, in which time he has dismissed roughly half its workforce and most of its executive suite. The new boss has upped the price for the Twitter Blue subscription to $8 and attached user verification to it. Musk told workers in the email that he wants to see subscriptions account for half of Twitter’s revenue.
  • Meta Platforms Inc.’s first major job cuts won’t be nearly enough to get the company back to being as profitable as it was just two years ago, according to analysts. Meta laid off 11,000 workers on Wednesday. Chief Executive Officer Mark Zuckerberg said he bore responsibility for growing the company too quickly, on a failed bet that the increase in social media activity and online shopping during the pandemic would continue. “I got this wrong,” he said. But at the end of a difficult day for thousands of employees, the company — parent to social media giants Facebook, Instagram and WhatsApp — is still facing many of the same problems it did a week ago, now with 13% fewer people. Meta is under intense scrutiny after posting its first two quarters of revenue declines compared to the same periods last year. At the same time, spending forecasts for next year to keep its social media apps relevant and pursue its long-term bet on virtual reality ballooned, surprising analysts and driving the stock down to levels not seen in seven years.
  • WeWork Inc. fell short of Wall Street’s expectations in the third quarter, failing to capitalize on a return-to-office push happening at companies in many global cities. The co-working company reported $817 million in sales for the period that ended in September, missing an average of analysts’ estimates compiled by Bloomberg. WeWork said Thursday it lost $629 million, compared with an average estimate of $367 million. Since WeWork’s failed attempt at an initial public offering in 2019 and its subsequent leadership change, the company — under chief executive officer Sandeep Mathrani — has been working toward achieving profitability and trimming parts of the business that don’t make financial sense. Earlier this fall, in an attempt to clear out under-performing buildings, WeWork closed about 40 of its office locations in the US, the company said Thursday.
  • More than 100,000 Russians and probably the same number of Ukrainian forces have been killed or wounded in the war, General Mark Milley, chairman of the US Joint Chiefs of Staff, was cited by the Associated Press as saying. Russia has ordered its troops to withdraw from Kherson, the first major urban center seized in its invasion. Milley said Moscow had amassed 20,000 to 30,000 troops in the southern city, and a full retreat could take several weeks. He added that a potential stalemate in fighting over the winter could provide a “window of opportunity” for negotiations.  The UK, meanwhile, said it has frozen over £18 billion ($20.5 billion) in Russian assets, some £6 billion more than any other sanctioned regime, according to the Office of Financial Sanctions Implementation.
  • Iran has produced its first hypersonic ballistic missile, the state-run Islamic Republic News Agency reported, as scrutiny grows over Tehran’s defense ties with Russia. The weapon targets anti-missile defense systems and represents a “major generational leap,” IRNA quoted Amirali Hajizadeh, commander of the Islamic Revolutionary Guard Corps’ Aerospace Force, as saying, without giving more details.
  • China’s top leaders reinforced the need to stick with the contentious Covid Zero policy, while urging officials to be more targeted with their restrictions so as to avoid damage to the economy. In a meeting of the new Politburo Standing Committee chaired by President Xi Jinping, they called for “more decisive” measures to curb the spread of the virus and resume normal life and production as soon as possible, according to the official Xinhua News Agency. The situation “remains severe” as flareups keep emerging, it said. The statement could further dampen any speculation about a potential Covid Zero exit, which fueled a huge rally for the nation’s financial markets last week. Speculation of more easing measures has dimmed as some of the nation’s biggest cities such as Beijing, Guangzhou and Chongqing confronted their worst outbreaks in at least several months.

*All sources from Bloomberg unless otherwise specified