November 17, 2022

Daily Market Commentary

Canadian Headlines

  • Brookfield Asset Management Inc. plans to expand into Saudi Arabia, joining BlackRock Inc. and global banks to tap investment opportunities in the biggest Gulf economy. Managing director Aanandjit Sunderaj will relocate to the Riyadh office once open, according to a statement. “There are vast investment opportunities within our main areas of focus including infrastructure, renewables, private equity and real estate,” said Jad Ellawn, regional head of Middle East at Brookfield. “We are very excited about the future and look forward to many opportunities within the kingdom in the years ahead.” Brookfield, which manages more than $750 billion, follows global firms in expanding into Saudi Arabia after wide-ranging economic reforms that sparked a flurry in capital markets activity and dealmaking. International banks including JPMorgan Chase & Co., HSBC Holdings Plc and Citigroup Inc. have also been increasing their presence in the oil-rich kingdom.
  • Fairfax India Holdings Ltd. is considering an initial public offering for Bangalore International Airport Ltd. that could value the asset at about 300 billion rupees ($3.7 billion), according to people familiar with the matter. The Indian arm of Canadian investment group Fairfax Financial Holdings Ltd. is working with an adviser on the potential listing that could take place as soon as next year, the people said. Fairfax India holds a majority stake in the owner of Kempegowda International Airport, Bengaluru, located in the southern Indian city also known as Bangalore. The Mumbai offering may raise between 30 billion rupees and 40 billion rupees, they said, asking not to be identified as the information is private. The IPO may consist of about 75% primary shares and the rest in existing shares, one of the people said.

World Headlines

  • European stocks gave up early gains to trade lower on Thursday, extending losses after posting their biggest one-day decline in five weeks as investors mull the path of central-bank policy and prepare for UK budget news. The Stoxx 600 Index was down 0.3% at 11:05 a.m. in London after yesterday snapping its longest winning streak in a month. Miners and telecom stocks were the biggest decliners, while food and beverages gained. The UK’s FTSE 250 Index was 0.5% lower ahead of the budget announcement by Chancellor of the Exchequer Jeremy Hunt. Domestically-exposed stocks are likely to be the most impacted by his measures, specifically retailers, homebuilders, leisure and hospitality, utilities and energy firms. The FTSE 250 has underperformed this week and is set for the worst decline since end-September.
  • Wall Street was poised for another day of losses amid mounting concerns about the health of the broader economy and signs that Federal Reserve officials do not see rate hikes pausing any time soon. S&P 500 futures turned sharply lower, reversing earlier gains of about 0.3%. Contracts on the tech-heavy Nasdaq 100, whose constituents tend to be more sensitive to interest rate moves, lost 0.6%, as US 10-year Treasury yields rose further, following indications from Fed officials on Wednesday that policy would tighten further. The dollar rallied half a percent against a basket of currencies. Stock markets are increasingly focusing on the outlook for the US economy, especially as a closely watched section of the Treasury yield curve remains near levels not seen in four decades — historically, a signal that the world’s biggest economy is on the cusp of recession.
  • Asian stocks declined amid fears that Federal Reserve’s tightening still has further go to curb inflation after strong US retail sales print. The MSCI Asia Pacific Index declined as much as 1.3%, its biggest drop in a week before paring losses. Tech drove losses with Meituan, Samsung and Netease leading the gauge lower.  Benchmarks in Hong Kong were notable losers in the region, with the Hang Seng Tech Index sliding as much as 5.6% before reducing the loss. They were down for a second day following rapid gains that put the gauges there into bull market territory. Equities in mainland China and South Korea also dropped while those in Japan, Australia and Singapore were slightly higher.
  • Oil dipped as investors shifted their focus back to concerns over the demand outlook after geopolitical tensions eased. West Texas Intermediate slid near $85 a barrel after closing 1.5% lower on Wednesday. China is grappling with rising Covid cases, while JPMorgan Chase & Co. projected the US will enter a “mild” recession next year due to interest-rate hikes. A stronger dollar added to bearish headwinds. Despite a barrage of geopolitical headlines this week, from a missile landing in Poland to an attack on a tanker in the Middle East, oil remains largely rangebound. Prices have been largely wedged between $80 and $95 since August, and traders continue to await the full impact of sanctions on Russian oil and a potential global economic slowdown.
  • Gold declined as the dollar edged higher, with traders weighing the reaction of the Federal Reserve to mixed US economic data. Moves by the US central bank to combat inflation through monetary tightening have helped drive the precious metal 14% lower from its March peak by boosting the dollar and Treasury yields. Investors are now anticipating a slowdown in the Fed’s super-sized rate hikes after US inflation data pointed to price pressures easing.
  • Macy’s Inc. reported third-quarter earnings that beat expectations and raised its full-year guidance as the retailer succeeded in luring shoppers despite consumers’ shift away from discretionary spending. Adjusted earnings per share were 52 cents in the quarter ended Oct. 29, above analysts’ average estimate of 19 cents compiled by Bloomberg.
  • Jeremy Hunt outlined a £55 billion ($65 billion) package of tax rises and spending cuts for the UK to plug a hole in the nation’s finances and restore confidence among investors. The Chancellor of the Exchequer hit the wealthy with higher taxes on wages and dividends and extended a windfall tax on oil and gas companies, telling the House of Commons on Thursday that he was prioritizing “stability, growth, and public services.” The task is enormous, patching up the economic damage wrought by the Covid-19 pandemic, the fallout from Russia’s war in Ukraine, and the disastrous tenure of Sunak’s predecessor, Liz Truss and her Chancellor, Kwasi Kwarteng, whose massive program of unfunded tax cuts sank the pound and roiled the bond markets.
  • A United Nations-brokered deal allowing exports of Ukrainian grain from the Black Sea will be extended, all sides confirmed Thursday, easing pressure on global food prices. Ukraine’s Infrastructure Minister Oleksandr Kubrakov said on Facebook that a decision to renew the accord for 120 days was reached in Istanbul, where talks have been held. Russia later confirmed the deal will be prolonged without any changes, Tass reported. Turkey echoed the plans, and the UN welcomed “the agreement by all parties.” That will keep crop shipments flowing from one of the world’s biggest grain and oilseed shippers, bolstering strained world supplies and benefiting Ukraine’s war-torn economy. Chicago wheat futures fell about 2% on the news, and corn and soybean oil retreated.
  • Confronted by a crypto crisis he helped spark, former Chief Executive Officer Sam Bankman-Fried is tweeting through it. On Wednesday, he added a further 18 tweets to a meandering thread he started at the beginning of the week. The posts, published at sporadic intervals, have combined apologies for his failings with his perspective on what went wrong at the companies he founded and ran. They add to a previous series of cryptic posts that eventually spelled out the message “What HAPPENED,” followed by a hint that there were revelations to come. With the wisdom of hindsight, he stated how he would do his best to save customers’ cash, mused on how hard it is to regulate the crypto sphere and boasted how he had been “on the cover of every magazine” before FTX’s meteoric crash. “We got overconfident and careless,” he said.
  • Starbucks Corp. baristas seeking union contracts with the coffee chain plan to mount daylong strikes Thursday at more than 100 cafes, saying management has refused to bargain in good faith. The planned work stoppage is the largest attempted so far by Starbucks Workers United, which has unionized around 260 of the company’s roughly 9,000 corporate-run US sites over the past year. The union says Starbucks has refused to negotiate in good faith, and that not a single store has reached a collective bargaining agreement with the company. While Workers United has prevailed in organizing votes across the country since its first victory in Buffalo, New York, the pace of new petitions has slowed.
  • Republicans won a narrow House majority that gives them the power to halt President Joe Biden’s agenda, yet their slim margin marked a letdown for a party that had counted on decisive election results as a springboard for the 2024 presidential race. More than a week after Election Day, the party finally gained the minimum 218 seats needed to control the chamber, the Associated Press reported Wednesday night, when incumbent GOP Representative Mike Garcia defeated Democrat Christy Smith in California. Roughly a half-dozen races still remain undecided. Despite concerns about Biden’s handling of the economy and the prospects of a recession, voters delivered a split verdict over who was to blame and how much weight to put on issues such as abortion rights and election deniers’ threats to democracy. While giving control of the House to the GOP, they kept the Senate in the hands of Democrats.
  • Donald Trump’s entry into the 2024 White House race adds a new degree of difficulty for federal prosecutors who’ve struggled for months to shield their investigations of the former president from accusations of political impropriety. The Justice Department is determined to continue the probes, but Trump’s status as a candidate means investigators will have to take extra procedural steps to shield their work. They will also face pressure to speed it up in order to resolve any criminal trial and appeals before voters head to the polls. If the Justice Department decides to indict him, Trump would be the first former president charged with a federal crime. And it would be under the auspices of the man who beat him for the presidency in 2020 and may run against him again in the 2024 election. Joe Biden hasn’t formally declared he is running again, though has said he plans to.
  • Alibaba Group Holding Ltd. reported a surprise loss after quarterly revenue barely grew, as China’s rigid Covid controls continue to sap consumer sentiment. Revenue rose a slightly less-than-expected 3% to 207.2 billion yuan ($29 billion) in the September quarter, versus the 209 billion yuan average projection. It reported a net loss of 20.6 billion yuan versus estimates for a profit of 18.8 billion yuan, after adjusting for market investments. The company also green-lit a $15 billion expansion to its buyback program. Alibaba is focusing on shoring up its bottom line as Covid policies and antitrust measures imposed during last year’s tech sector crackdown sap growth. This month, the company failed to disclose full sales results for its signature Singles’ Day shopping festival for the first time in 14 years, suggesting a disappointing turnout for its most important annual event. And Chinese retail sales contracted 0.5% in October — the first decline since May and worse than expectations for marginal growth.
  • Ukraine’s president appeared to soften his insistence that it was only a Russian missile that caused a lethal blast in Poland this week and said a team would investigate after US President Joe Biden disputed the claim. Volodymyr Zelenskiy said his military officials had told him that images of the crater at the blast site suggested it couldn’t have been caused solely by the remnants of a Ukrainian anti-air rocket. He said he “was sure that it was a Russian missile” but also that he was certain Ukraine had launched weapons to defend against a Russian barrage. Ukraine shot down more than 70 of the almost 100 rockets that Moscow fired on Tuesday, according to Ukrainian officials.
  • Ant Group Co. incurred a steeper profit decline in the three months ended in June, as the fintech giant molds itself to appease Chinese regulators. The Hangzhou-based company contributed 2.4 billion yuan ($335 million) to Alibaba Group Holding Ltd.’s earnings, a filing showed Thursday. Based on Alibaba’s one-third stake in Ant, that translates to an estimated 7.3 billion yuan of profit for Ant’s June quarter, down 63% from a year earlier. Ant’s earnings lag a quarter behind Alibaba’s.  The fintech business controlled by billionaire Jack Ma has been expanding in Southeast Asia while seeking to become a financial holding company at home. Ant has been restructuring its operations, including beefing up capital, curbing consumer lending and shuffling management.
  • Iran’s rapidly expanding nuclear program and restrictions on international monitoring are hurtling toward another dangerous crisis while raising doubts over the Islamic Republic’s claim its atomic work is peaceful, western diplomats said. The International Atomic Energy Agency’s board of governors is weighing whether to formally censure Iran for a second time this year at their quarterly meeting convened this week in Vienna. Iran continues stonewalling an IAEA probe into uranium traces sampled at three undeclared sites while its stockpile of fuel — enriched just below weapons grade — rises to record highs. The US and its European allies sponsored a resolution of censure at this week’s board, demanding that Iran urgently cooperate with the IAEA. The motion is likely to pass even without the support of China and Russia, which stood against the last censure in June.
  • China’s 84.2 trillion yuan ($11.8 trillion) local credit market has been rocked this week by an unprecedented selloff amplified by low liquidity. Corporate bond yields largely extended increases Thursday, traders said, after the rates on three-year AAA rated company notes jumped a record 37 basis points this week through Wednesday. That had pushed spreads over government debt up 19 basis points this week, the worst blowout since July 2020. The selloff started in sovereign bonds before spreading. The moves are shining fresh light on a longstanding risk in global financial markets: how pockets of low liquidity can set the stage for unexpected and rapid moves.

*All sources from Bloomberg unless otherwise specified