November 15, 2022

Daily Market Commentary

Canadian Headlines

  • Brookfield Asset Management Inc. is making a foray into the recycling business, creating a new firm with an investment of as much as $700 million through its sustainability fund. Publicly traded Brookfield Renewable Partners LP struck a deal with Closed Loop Partners LLC to establish a company called Circular Services. The new entity, formed from the merger of five of Closed Loop’s portfolio companies, will handle paper, metal, glass, plastic, textiles and other materials in seven states, including New York and Texas. It will be the largest closely held recycling company in the US, according to a statement. Brookfield has invested $200 million for a minority stake and committed as much as $500 million more to help Circular Services pursue growth opportunities. The investment is being made via the Brookfield Global Transition Fund.
  • ESG-focused hedge-fund startup Nordis Capital captured a C$60 million ($45.1 million) mandate from Quebec-based Eterna Investment Management to run international and US equity strategies. “We are looking for outside expertise for our global strategies,” Eterna President Pierre-Olivier Tardif said in an interview. “Companies we invest in must be sustainable in the long term, and create value instead of destroying it.” The money will first be invested in Nordis Capital’s long-only equity funds, which include value stocks such as farm equipment maker Deere & Co. and supermarket chain Sprouts Farmers Market Inc. — two companies with above-average ESG ratings, according to data compiled by Bloomberg. “These strategies have proved to be resilient to the market conditions we have experienced over the past few years,” said Nordis Managing Partner Francois Boutin-Dufresne.

World Headlines

  • European equities were little changed near a three-month high amid optimism about China’s reopening and economic support measures as major benchmarks traded on the cusp of bull market levels. The Stoxx Europe 600 index was steady by 11:59 a.m. in London. Utilities, media and technology outperformed while retail and real estate lagged. The DAX Index was 0.2% lower after yesterday closing on the verge of a bull market on the improving sentiment out of China. European equities are trading around their highest level in three months after better-than-expected third-quarter earnings and as US inflation cooled more-than-expected in October. The region’s shares are quickly recovering from this year’s slump that was fueled by concerns over hawkish central banks fighting surging inflation and Europe’s energy crisis.
  • Bulls piled back into global stock markets, encouraged by an easing in Sino-US tensions and growing confidence that the Federal Reserve will be able to slow its rate hiking pace. As Treasury yields and the dollar slipped, index futures on the Nasdaq 100 jumped more than 1%, boosted also by hefty gains earlier across Asian technology companies. Chipmakers Advanced Micro Devices Inc., Nvidia Corp. and Intel Corp. rose between 1.3%-2% in US premarket trading, while Tesla Inc., Inc., Apple Inc., and Alphabet Inc. all added about 1% each. Markets have turned risk-on in recent days, trading off a softer-than-expected US data print that many reckon will allow the Fed to raise rates in 50 basis-point increment, after consecutive 75 basis-point hikes. That view was encouraged by Vice Chair Lael Brainard who said on Monday it would probably be “appropriate soon to move to a slower pace of increases.”
  • Asian stocks rallied as China led the region higher, buoyed by more property easing measures and signs of reduced US-China tensions. The MSCI Asia Pacific Index rose as much as 1.9% to a two-month high, lifted by technology shares. Chinese stocks in the sector helped pace the benchmark’s gain as investors bet the worst may be over for some of the major players. Meanwhile, Taiwan’s TSMC surged after a filing showed Warren Buffett recently bought a stake of about $5 billion in the chipmaker. China and Hong Kong benchmarks extended their recent rebounds, with the Hang Seng Index entering a bull market, as regulators moved to further ease a liquidity crunch faced by real estate developers. Sentiment was also lifted by Monday’s meeting between Joe Biden and Xi Jinping that generated hopes of warmer ties between the two superpowers. That encounter offset the weak retail sales data that underscored the impact of Covid lockdowns on China’s economy.
  • Oil extended losses as concerns over the near-term demand outlook overshadowed the risk of tightening supply heading into winter. West Texas Intermediate futures slid below $85 a barrel after closing 3.5% lower in the previous session. OPEC cut its forecasts for global demand in the fourth quarter again, and the International Energy Agency said global oil consumption is poised to contract 240,000 barrels a day this quarter compared with a year ago. Key market gauges have softened in recent days, too. The nearest timespread for US crude — which indicates how scarce supply is — fell to its weakest level in seven weeks. Brent’s futures curve has also turned lower in recent days.
  • Gold edged higher as the dollar weakened, while investors considered what the latest comments from a senior Federal Reserve official may mean for the trajectory of interest rates. Aggressive rate increases have pressured bullion this year, which usually has a negative correlation with the dollar and bond yields since it is priced in the US currency and bears no interest. Investors have been looking for signs that the Fed may pivot to smaller hikes, which could boost gold.
  • Economists see US inflation running hotter through next year than they did a month ago and recession odds continue to mount against a backdrop of rising borrowing costs. Projections for the personal consumption expenditures price index — the Federal Reserve’s preferred inflation metric — were raised for each quarter of 2023. Still, price pressures are seen cooling sharply over the course of the year. By the final three months, the PCE price index will average 2.8% in the wake of sluggish economic activity and higher interest rates. The figures are based on the median forecast of 65 economists in a Bloomberg survey conducted Nov. 4-11. Roughly half of the responses were collected prior to the Nov. 10 release of the consumer price index, which showed inflation rose at a slower-than-expected pace in October.
  • Walmart Inc.’s third-quarter profit surpassed Wall Street’s projections, and the retail giant raised its full-year guidance, showing resilience as US shoppers sought bargains amid soaring inflation. Adjusted earnings of $1.50 a share in compared with the average analyst estimate of $1.32. The company raised its profit forecast for the year, suggesting it expects a healthy holiday season. A shift in consumer spending away from general merchandise had left the retailer with bloated inventories, forcing it to mark down prices on items such as apparel. Chief Executive Officer Doug McMillon said the company “significantly improved” its inventory pile-up, quelling fears that the retailer was headed into the holiday season with too many unwanted goods. Inventory was up 12.4% in the third quarter, primarily due to inflation. That compared with a 25.6% increase in the second quarter.
  • Donald Trump is barreling ahead with plans for a third White House run even as a growing number of Republicans abandon the former president over the dismal GOP showing in midterm elections that many in the party blame on him. After teasing for weeks his entry into the 2024 presidential race, Trump is poised to make a “very big announcement” Tuesday at 9 p.m. New York time that would make him the first major contender from either party to formally declare. Yet the timing could not be worse for Republicans. Candidates endorsed by Trump floundered in key races in last week’s mid-term elections, as voters rejected election-deniers and others with extreme positions on social issues like abortion rights and education.
  • Economists largely stuck to their forecasts that the Federal Reserve will raise interest rates to 5% by March and hold them there for most of 2023, even after inflation slowed last month by more than forecast. The Federal Open Market Committee will raise rates an additional percentage point over the next several meetings to confront inflation near a 40-year high, according to a Bloomberg survey of 65 economists that took place Nov. 4-11. The economists kept their view of the Fed’s policy path despite a surge in markets following an unexpectedly large slowdown in price gains in October.
  • China’s economic activity weakened in October, putting pressure on Beijing to ramp up support after it took major steps in the past week to reduce the drag on consumers from Covid Zero policies and a property slump.  Retail sales contracted 0.5% in October from a year earlier — the first decline since May and worse than economists’ expectations for 0.7% growth. Industrial output growth weakened, property investment continued to contract and the jobless rate remained high. October saw a surge in Covid cases, with authorities tightening controls ahead of the Communist Party’s congress and discouraging travel during the weeklong National Day holidays. With Covid infections continuing to spread in November — including in major manufacturing hub Guangdong — where partial lockdowns have been imposed — the growth outlook for the rest of the year remains grim.
  • Britain’s job shortages showed no signs of easing in the third quarter as more people dropped out of work and wages grew at the fastest pace in over a year, adding to inflationary concerns for the Bank of England. Both the number of employed and unemployed fell, while 108,000 more people became economically inactive in the three months to September. That took the total increase in those not seeking work since the start of the pandemic to 630,000. The figures from the Office for National Statistics underline the case for the central bank to keep raising interest rates. Policy makers are seeking to head off a wage-price spiral after consumer prices jumped 10.1%, the most in four decades.
  • US President Joe Biden and Indonesian President Joko Widodo will announce a climate finance deal providing $20 billion to help Indonesia pivot away from coal power. The funding deal, brokered between the US, Indonesia and Japan, is set to be outlined Tuesday on the sidelines of the Group of 20 summit in Bali, following more than a year of talks. It is the largest single climate finance transaction ever, according to a senior US Treasury Department official. Under the package, Indonesia will commit to capping carbon dioxide releases from its electricity sector at 290 megatons by 2030 — an emissions peak that will apply not just to its conventional grid but also power suppliers for industrial facilities. The country will also establish a goal of reaching net-zero emissions in the power sector by 2050 and commit to boost deployment of renewable energy so that it comprises at least 34% of all power generation by the end of this decade.
  • Home Depot Inc. reported sales and profit that exceeded expectations as the company’s professional products and services continued to bolster results. The home-improvement retailer said Tuesday that comparable sales rose 4.3% in the quarter ended Oct. 31. Analysts surveyed by Bloomberg had expected a 3% gain. Earnings per diluted share rose to $4.24 in the quarter, compared with an estimate of $4.13. Home Depot maintained its guidance for the full year, saying earnings per share will likely grow by a mid-single-digit percentage.
  • Credit Suisse AG declined the most among major European banks after analysts pointed to the lack of financial details surrounding the agreed sale of a large part of its securitized products business to Apollo Global Management Inc.  The Zurich-based lender’s stock declined as much as 2.4% on Tuesday, making it the day’s worst performer so far among the Bloomberg Europe Bank and Financial Services index. The shares have lost more than half their value this year. Credit Suisse said earlier it’s transferring a large portion of SPG assets to Apollo and other unnamed investors will likely take over some of the rest. The Swiss bank is providing financing for some of the assets being transferred and will release $10 billion of risk weighted assets after the deals, less than half the capital the business consumes.
  • Bonus season is looking grim on Wall Street, with year-end incentive pools expected to drop sharply across the finance industry amid a pullback in mergers and acquisitions, persistent inflation and the threat of a potential recession. Bankers advising on M&A are likely to their bonuses decline as much as 20% this year, while their counterparts in underwriting will probably have the largest drop, with their incentive pay plunging as much as a 45%, according to a closely watched report from compensation consultant Johnson Associates Inc. released Tuesday. At the five biggest Wall Street firms, investment-banking revenue fell more than 45% in the first nine months of 2022 from a year earlier. Inflation, fears of a recession and global tensions including the ongoing war in Ukraine have spurred wild market swings that kept dealmaking, including initial public offerings, mostly muted. The battle for talent has slowed in the finance sector, with some firms indicating cuts to compensation and staffing as tools for managing expenses.
  • JPMorgan Chase & Co. is on the hunt for buyouts to lend to and is hoping to gain market share in leveraged financing after avoiding the dozens of clunkers that have cost competitors billions of dollars. Executives across JPMorgan made a decision last year to cut back on risk in leveraged finance, a choice that surprised customers and competitors. That decision helped the bank avoid losing money from big buyouts like Citrix Systems Inc. and Twitter Inc., and now gives it more capacity to pivot. “We want to gain market share with smart underwrites,” Daniel Rudnicki Schlumberger, the bank’s co-head of leveraged finance for EMEA said in an interview. “We will not do anything kamikaze, no shooting over-the-hill underwriting assuming the market will get better.”
  • Russia is expected to agree to extend a United Nations-brokered deal allowing exports of Ukrainian grain and other farm products from the Black Sea, ensuring a vital flow of foodstuffs to the world market. Russia is likely to allow the deal to renew after its Nov. 19 expiration, according to four people familiar with the situation, all of whom spoke on condition of anonymity to discuss matters which aren’t yet public. They didn’t specify whether Russia would seek to add new conditions in return for the extension or any other details. A spokesperson for the joint body administering the deal from Istanbul said there’s nothing to confirm or announce at this stage. Kremlin spokesman Dmitry Peskov said Russia will disclose its decision “in due time.”

*All sources from Bloomberg unless otherwise specified