The Daily – November 21, 2023

November 21, 2023

Daily Market Commentary

Canadian Headlines

• Finance Minister Chrystia Freeland will release the government’s fall fiscal and economic statement around 4 p.m. in Ottawa. It’s expected to include money to stimulate housing construction and a tax-rule change designed to discourage owners from renting out their properties on Airbnb and other short-term rental sites. Statistics Canada releases inflation data for October at 8:30 a.m. Ottawa time. Economists are expecting a 3.1% yearly change in consumer prices and a 0.1% rise over September.
• Capital Power Corp. agreed to buy two US natural gas-fired power plants in a $1.1 billion deal that’s partly backed by BlackRock Inc. and would make the Canadian company one of North America’s largest generators. BlackRock and Capital Power are forming a 50/50 partnership to buy the Harquahala generating facility in Arizona, and the Canadian company also is buying the La Paloma generating facility in California, according to a statement Monday. Capital Power is partly financing the deal with a C$300 million ($218 million) public bought offering and a C$100 million private placement with provincial pension fund manager Alberta Investment Management Corp. Capital Power, based in Edmonton, Alberta, is gaining 1.6 gigawatts of gas-fired generation capacity in the US, making it North America’s fifth-largest operator of that type of power production. The purchase from Beal Financial Corp.’s CSG Investments Inc. is expected to add to Capital Power’s adjusted funds from operations in the first full year of ownership.

World Headlines

• European stocks were subdued on Tuesday as investors awaited the Federal Reserve’s policy minutes and after the Bank of England warned that rates may have to rise again. Miners outperformed. The Stoxx Europe 600 Index was little changed, hovering near a two-month high, at 8:10 a.m. in London. Basic resources shares led gains after iron ore surged on optimism about China’s latest economic stimulus drive. Banks and energy stocks underperformed. European stocks have gained about 5% in November, and are tracking their biggest monthly gain since January, on optimism that central banks are ready to take a more dovish tone on policy. Minutes of the Federal Reserve’s last policy meeting will be in focus later on Tuesday. Bloomberg Economics expects them to shed light on why the committee’s policy statement were relatively dovish despite strong economic data leading into the gathering.
• US equity futures wavered on Tuesday as some investors questioned the sustainability of a powerful rally fueled by expectations of a Federal Reserve pivot to rate cuts. Contracts on the S&P 500 and Nasdaq 100 were little changed. Agilent Technologies Inc. jumped in pre-market trading after an earnings beat, while Gen Digital Inc. gained after Morgan Stanley lifted its rating on the cybersecurity company’s stock. Lowe’s Cos Inc. slumped after cutting its sales forecast. Markets are pricing in about a 30% chance of a Fed rate cut in March. Minutes of the last rate-setting meeting, due to be published later today, may provide more insights into policy makers’ thinking. The dollar extended its decline, while the Treasury yields were steady.
• Asian stocks advanced for a third day, led by Taiwan, as technology shares rose amid the dollar’s fall and the continued improvement in risk sentiment. The MSCI Asia Pacific Index rose as much as 1%, on course for the highest close in about two months. Tech stocks such as TSMC and Alibaba sent the benchmark higher as a weakening dollar supported the sector, and artificial intelligence-related companies climbed ahead of Nvidia’s earnings results. Taiwan’s stock gauge finished at the highest level since April 2022, thanks to the AI-led chip rally. Growing bets on the potential end of the Federal Reserve’s rate-hike cycle, a weak dollar and an upbeat outlook for the region’s equities in 2024 are supporting the key Asian stock benchmark, which climbed above its 200-day moving average.
• Oil pared a two-day advance that was driven by speculation OPEC+ may choose to deepen supply cuts at a meeting this weekend. Global benchmark Brent eased below $82 a barrel after rising more than 6% over the prior two sessions. US oil options point to many traders betting that the producer group is poised to add to output curbs in a bid to reverse a recent slide in prices. Between now and the weekend meeting, traders will get fresh insights into US fundamentals with the release of official figures on crude and product stockpiles. Nationwide crude inventories have expanded for the past four weeks to the highest since August. There’s also a US holiday that is likely to curtail trading activity in the second half of the week.
• Gold rose to a two-week high as the dollar extended a slide on bets that the Federal Reserve will pivot to interest-rate cuts next year. The Bloomberg Dollar Spot Index has slumped this month to its lowest since late August, making bullion less expensive for buyers in foreign currencies. The slide in the greenback followed US economic data that indicated inflation and the labor market was cooling. Bullion has consolidated in recent weeks after soaring following Hamas’s attack on Israel. While concerns that the conflict could spill over into the wider Middle East region have eased, gold has held most of its gains, drawing support from bets on the Fed cutting rates multiple times next year.
• Treasury investors are turning increasingly skeptical the Federal Reserve will deliver a soft landing for the US economy next year, elevating concern of a looming recession over the risks posed by inflation and a swelling budget deficit. That’s the message from the latest move in the so-called term premium, which describes the extra yield investors demand to own longer-term debt instead of rolling over shorter-dates securities as they mature. The gauge, which is famously tricky to calculate, is a measure of protection against unforeseen risks such as inflation and supply-demand shocks, encapsulating everything apart from expectations for the path of near-term interest rates.
• Hamas said the group is close to reaching a “truce agreement” with Israel via Qatari mediation in rare public comments that suggest talks over freeing some hostages are progressing and could lead to a limited pause in fighting. Hamas leader Ismail Haniyeh’s announcement came after US President Joe Biden said Israel and the militant Palestinian group are closing in on a deal to free some of the 240 people kidnapped when Hamas fighters stormed Israel on Oct. 7, killing about 1,200 people. Israel, which has vowed to destroy Hamas, has said for weeks that it won’t contemplate a cease-fire until all hostages were released. But in recent days there have been growing signs the two sides are getting closer to a deal to free some abductees that would include a temporary cessation in fighting.
• Lowe’s Cos. reduced its full-year revenue forecast again, underscoring the shift away from big home-renovation projects after the pandemic boom. Same-store sales fell 7.4% in the third quarter ended Nov. 3 — the fourth consecutive decline. Analysts expected a 4.9% drop. For the full year, Lowe’s now sees adjusted revenue dropping 5%, rather than a decline of 2% to 4%. In May, Lowe’s lowered its forecast due to lower spending on discretionary items such as patio furniture and appliances. The results follow Home Depot Inc.’s report last week that also showed a drop in comparable sales, along with narrowed guidance for the full year. In the current fiscal year, analysts expect both Lowe’s and Home Depot to report their first simultaneous declines in revenue growth in 13 years.
• Uber Technologies Inc. boosted the size of its planned convertible bond issue to $1.5 billion, signaling strong demand among investors. The ride-hailing giant priced the offering with a 0.875% coupon, according to a statement, near the bottom of a marketed range. The company set a conversion premium of 32.5% at the top of the range. The announcement confirmed an earlier report by Bloomberg News. With a market value of $113 billion, Uber is the largest company to tap the convertible bond market this year. Its latest move takes advantage of the recent decline in interest rates, as the market increasingly believes the Federal Reserve’s rate hike cycle is over.
• France is at risk of flouting European Union fiscal guidance while Germany and Italy aren’t seen to be fully complying, people familiar with the matter said in advance of an annual scorecard from Brussels. The draft watch list of countries — scheduled for release on Tuesday — forms part of the European Commission’s opinion on national budgets for 2024, a year when the bloc is set to reinstate debt and deficit rules suspended during the pandemic. While the verdicts could still change, the assessment reveals how brazen Brussels officials judge some of Europe’s most indebted countries to be at a time of rising borrowing costs and heightened scrutiny on public finances. Being on the list doesn’t have automatic repercussions, though it could prompt sanctions at a later stage.
• Japan’s government is asking liquefied natural gas importers to secure new decades-long supply deals under efforts to boost energy security. The Ministry of Economy, Trade and Industry has been meeting with Japanese buyers, as well as overseas suppliers, to urge the signing of more long-term LNG contracts, according to people with knowledge of the discussions. The push is meant to insulate Japan from future supply shocks, as well as potentially harsher sanctions against Russian fuel exports, the people said. The move is another step by Japan, the world’s biggest LNG importer last year, to ensure that power producers and industries have enough gas amid the transition to cleaner sources. It comes after European and Asian rivals signed several 27-year deals with Qatar in recent months, raising questions over their climate commitments.
• European lenders are rushing to the bond market to make a start on next year’s funding, taking advantage of a window of positive investor sentiment. The prefunding has helped drive bank bond sales from the region to €44.9 billion ($49.2 billion) so far this month, taking the year-to-date total to the highest since 2010, according to data compiled by Bloomberg. That includes the likes of Societe Generale SA and Barclays Plc starting on their 2024 debt needs. They are piling in as they no longer have access to cheap central bank funds, and now is a good time to sell with a gauge of credit risk near the lowest in over a year. Banks are also eager to take some of the pressure off 2024’s financing, after 2023 was riddled with obstacles to the smooth functioning of funding markets — from bank collapses to wars.
• Germany imposed an emergency spending freeze in response to last week’s ruling by the country’s top court, deepening an unprecedented budget crisis that has rocked Europe’s biggest economy. Chancellor Olaf Scholz’s government has been racing to work out the implications of the Constitutional Court judgment, which called into question hundreds of billions of euros of financing in special funds that are not part of the regular federal budget. The Finance Ministry in Berlin on Monday froze virtually all new spending authorizations for this year as it tries to identify the broader and longer-term impact, according to a letter sent to government ministries seen by Bloomberg.
• Microsoft Corp. Chief Executive Officer Satya Nadella signaled that he’d be open to Sam Altman going back to OpenAI, rather than joining his company as part of a surprise move announced over the weekend. Whether Altman joins Microsoft or returns to OpenAI — as some of the startup’s investors have been trying to arrange — the entrepreneur will be working with Microsoft, Nadella said in an interview with Bloomberg Television. Microsoft is the biggest backer of OpenAI, the startup where Altman was ousted as CEO last week, ensuring that the software giant will maintain ties with him. In one of many shocking twists in the OpenAI saga, Nadella announced on Sunday that he was hiring Altman to run a new artificial intelligence group at Microsoft. Altman’s firing from OpenAI on Friday had stunned Silicon Valley, and investors in the startup have lobbied for his return.
• China’s MMG Ltd. has clinched one of the biggest copper deals of the year, agreeing to pay $1.9 billion for a mine in southern Africa as major commodities groups vie to add supply of the red metal. MMG, controlled by state-owned China Minmetals Corp., said on Tuesday it had agreed to buy Cuprous Capital Ltd., a private company which owns the Khoemacau operation in Botswana, producing copper since 2021. Copper has become a key focus for global miners as the energy transition takes hold, with demand for the metal vital for electric vehicles and power grids set to rise. Glencore Plc.’s tilt at Teck Resources Ltd. was motivated at least partly by the latter’s copper assets, while BHP Group Ltd. this year paid A$9.6 billion ($6.3 billion) — a generous 49% premium — for smaller copper rival OZ Minerals Ltd.
• Blackstone Inc. is winding down a strategy that allocated capital to hedge funds ranging from Two Sigma Investments to Magnetar Capital. The Blackstone Diversified Multi-Strategy fund will shutter by the end of the year. The fund operates under the European Union’s UCITS Directive and provides investors daily access to their capital, a structure that has come under pressure. It manages about $200 million in assets, down from its peak $2.3 billion in 2018.  “We are in talks with clients to move their capital to newer strategies that offer greater flexibility than the current structure allows,” a spokesman for the investment firm said in a statement confirming plans to close the fund.