November 22, 2023

Daily Market Commentary

Canadian Headlines

  • Prime Minister Justin Trudeau’s government revealed billions in new spending on housing programs and industrial subsidies, increasing Canada’s budget deficit in the coming years amid the dual pressures of higher borrowing costs and a slowing economy. The deficit during the current fiscal year is projected to be C$40 billion, in line with the budget of March; next year, the forecast is for C$38.4 billion, up from C$35 billion. The government backed away from the idea of eliminating the Canada mortgage bond program, responding to pressure from investors who wanted the product kept alive.
  • Royal Bank of Canada wanted to return to the US personal and commercial banking business, and City National Bank seemed to have it all: wealthy Hollywood clients, a foothold in the massive California market and a long history of churning out profits. Now, almost a decade later, City National has become a $10 billion headache. That’s roughly how much Royal Bank, Canada’s largest lender, has poured into its US subsidiary — an initial purchase price of $5 billion, followed by a series of hefty capital injections. Regulatory filings by Los Angeles-based City National shed light on why the “bank to the stars” recently needed a balance-sheet bailout from its parent company. They suggest the bank turned to almost $20 billion in high-cost funding to make up for a rapid decline in deposits when many of its wealthy customers yanked their money in search of better returns elsewhere. In 2016, Royal Bank said it expected City National to churn out $1 billion of pretax income by 2020, but it’s never come close — adjusted net income that year totaled just $370 million. More recently, it’s been in the red, posting a $12 million loss in the last reported quarter as it faced the increase in funding costs along with slower loan growth and higher operating expenses.
  • India has restored online visa services to Canadian nationals in a sign that relations are improving after the two countries sparred over the killing of a Sikh separatist leader. Canadian nationals can now apply for online visas, according to senior government officials in India, who asked not to be named discussing a sensitive subject. The online visas are issued for short visits to India and include tourist and business-related trips. The resumption of visa services comes on a day when Canadian Prime Minister Justin Trudeau is expected to address a virtual meeting of the G-20 grouping that India chairs. Relations between Ottawa and New Delhi plunged after Prime Minister Trudeau alleged that India was responsible for the murder of Hardeep Singh Nijjar, a Sikh separatist leader in Canada. Nijjar is wanted in India for terrorism-related offenses and was shot dead outside a Sikh temple in suburban Vancouver on June 18.

World Headlines

  • European stocks ticked higher after the Federal Reserve policymakers at their most recent meeting united around a strategy to “proceed carefully” on future interest-rate moves, which was seen as a dovish tilt by market participants. The Stoxx Europe 600 Index rose 0.3% as of 8:13 a.m. in London after a slight drop on Tuesday, helped by gains in real estate and consumer products sectors. Retail underperformed after Kingfisher’s 2024 profit outlook missed estimates. European stocks have gained more than 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. European banks were also in focus after the European Central Bank wrote to about 20 lenders to warn them that it will impose fines unless they address shortcomings in their management of climate risk, according to a report by Bloomberg.
  • US equity futures rose as traders awaited a slew of US economic data before markets pause for holidays in America and Japan. Futures on the S&P 500 and Nasdaq 100 edged higher as Wall Street heads for one of the best November rallies on record. Nvidia Corp. gained in pre-market trading, reversing an early decline as investors initially reacted coolly to its latest quarterly report. Deere & Co. and Autodesk Inc. fell after disappointing results. Microsoft Corp. climbed about 0.7% as Sam Altman headed back to OpenAI after days of drama in the artificial intelligence space. His return to head the world’s best-known AI startup marks a victory for its biggest backer Microsoft, which worked with fellow investors to reverse Altman’s firing. Investors are looking to data on US jobless claims, durable- and capital-goods orders and consumer sentiment later Wednesday for clues on the direction of monetary policy.  The dollar hovered near its weakest level in almost three months Treasury yields dipped.
  • Asian stocks declined, pausing their three-day winning streak, as technology shares weighed while Chinese benchmarks dropped. The MSCI Asia Pacific Index slipped as much as 0.6%, on course for its first drop in four sessions. The biggest drags on the gauge were TSMC and Advantest, as AI-related hardware stocks dropped after Nvidia’s earnings beat estimates but fell short of investors’ lofty expectations. Benchmarks in mainland China were among the region’s notable losers while gauges closed flat in Hong Kong, after a short-lived rally spurred by new support measure for the troubled property sector. Equities in Taiwan, Thailand and Indonesia also posted moderate losses while those in Japan advanced as the yen steadied.
  • Oil extended declines as the OPEC+ meeting set for this weekend appeared to be heading into trouble. Global benchmark Brent fell as much as 3.3%, trading below $80 a barrel. There was a chance that the gathering could be delayed for an unspecified period of time, as Saudi Arabia undertook difficult talks with member states about production levels, delegates said. US inventory figures due later on Wednesday may offer an interim clue on the market’s direction before the Thanksgiving holiday in the US, after data from the American Petroleum Institute was reported to show a large increase in crude stocks. Oil has been buffeted in recent weeks by indications that supplies are expanding, prompting speculation the Organization of Petroleum Exporting Countries and its allies will extend output cuts or, possibly, deepen them. Citigroup Inc. has put the odds of a further reduction at one in five, while rival Goldman Sachs Group Inc. put the figure at about one in three, though those predictions were made before the talks appeared to snag.
  • Gold steadied around the $2,000-an-ounce threshold ahead of US jobless claims data that may bolster bets on interest-rate cuts next year. Bullion is up about 3% since the start of last week, buoyed by falling Treasury yields and a drop in the dollar. The metal advanced on Tuesday, with gains accelerating after a break above the $2,000 mark. Spot gold was little changed at $2,000.64 an ounce at 12:01 p.m. in London, after rising 1% on Tuesday. It’s up almost 10% this year. Silver edged up, while platinum was steady and palladium declined.
  • A below-average rain forecast through the end of the month signals water levels on the Mississippi River are at risk of shrinking further, threatening the delivery of US crops across the world. “As we head into December, when most northern precipitation falls in the form of snow, it will be difficult for water levels to recover in a meaningful way,” said Susan Stroud, a grain analyst for No Bull in St. Louis. “We might be falling off a cliff.” After a hot summer, water levels on the river at Memphis sank to a record low -12.04 feet below base levels in mid-October but later saw a rebound, which helped US exports. Further declines in the water level, however, could mean another setback for US farmers suffering with higher shipping costs and delays. Outstanding sales for delivery in the current season are among the lowest for the past decade.
  • Brazil’s central bank has room to continue lowering interest rates as inflation is well-behaved even if still a bit above the target, Governor Roberto Campos Neto said during an interview with Bloomberg Television. Monetary policy remains so restrictive in Brazil “because as inflation goes lower, real rates go higher,” Campos Neto said Tuesday, referring to the difference between nominal rates and inflation. “So we have space to lower rates and still be in the restrictive camp.” Swap rates fell across the curve on Wednesday, with contracts maturing in January 2027 dropping 11 basis points, as remarks from the central bank chief further encouraged bets on lower interest rates.
  • Hamas agreed to free 50 hostages from Gaza in return for a four-day ceasefire with Israel and the release of 150 Palestinian prisoners. While Israeli Prime Minister Benjamin Netanyahu was quick to say war will continue until Hamas is destroyed as an organization, it will be the first major lull in fighting since the conflict erupted just over six weeks ago when Hamas militants attacked Israel. Hamas said there would be a “cessation of all military operations” in Gaza during the four days. Israel will halt airstrikes throughout the Gaza strip, and stop flying intelligence drones over the north, where most of its ground forces are, for six hours a day.
  • Sam Altman will return to lead OpenAI less than five days after he was pushed out of one of the world’s most valuable startups, setting off a shock back-and-forth drama that transfixed Silicon Valley and the global AI industry. Altman is returning as chief executive officer and the initial board will be led by Bret Taylor, a former co-CEO of Salesforce Inc. The other directors are Larry Summers, the former US Treasury Secretary, and existing member Adam D’Angelo, the co-founder and CEO of Quora Inc. OpenAI is now working “to figure out the details,” the company said in a post on X, formerly Twitter. The decision to restore him to the world’s best-known AI startup marks a significant victory for Microsoft Corp., which worked with fellow investors to reverse Altman’s firing. CEO Satya Nadella publicly supported Altman throughout the turmoil and briefly agreed to hire him at Microsoft to start a new in-house research group.
  • A record 30 million people are expected to catch a flight over the Thanksgiving holiday, but airlines that specialize in low-cost US travel still don’t have much of a reason to celebrate. Spirit Airlines Inc., Southwest Airlines Co. and other domestic-focused carriers are slashing their already low prices. After pandemic-related lockdowns ended, budget domestic airlines bolstered their supply of seats to accommodate a massive influx of travelers in 2022. But these days they’re often empty because passengers are gravitating toward more-expensive, internationally focused competitors. As a result, domestic-focused carriers, a group that also includes Frontier Group Holdings Inc. and JetBlue Airways Corp., are expected to struggle financially in 2024 and possibly 2025, analysts say. Those companies have already had a hard year. They’ve been battered by grounded or delayed aircraft, rising labor costs, volatile fuel prices, and congestion magnified by a shortage of air traffic controllers that’s affecting the whole industry.
  • Deere & Co. shares slid after the company forecast smaller-than-expected profit next year, with slowing equipment demand from farmers starting to weigh on the world’s largest tractor maker. Net income for the fiscal year will be between $7.75 billion and $8.25 billion, Deere said Wednesday after reporting fourth-quarter earnings that beat analyst estimates. Its full-year outlook came in well below estimates compiled by Bloomberg of $9.32 billion, prompting the stock to drop as much as 7.7% in pre-market trading. Sliding crop prices have hit machinery makers in recent months, with farmers less willing to buy new equipment for planting and harvesting. While demand for new tractors remains elevated, there’s concerns that production of farm equipment could start outstripping demand.
  • The Czech governing coalition is likely to water down legislation on company overhauls to ease concerns of investors in eastern Europe’s largest traded power utility CEZ AS, according to people familiar with the matter. The ruling parties will probably tweak the bill, currently debated in parliament, in a way that would preserve more influence of minority owners over asset splits, said three people with knowledge of the deliberations who didn’t wish to be named because the negotiations aren’t public. The disputed draft is part of government efforts to try to gain more control over critical energy infrastructure to avoid a repeat of last year’s spike in power and natural gas prices. CEZ, which has a market value of about $24 billion, was seen as a key part of the plan because its power plants dominate electricity production in the country.
  • China exported small amounts of two minerals crucial to high-tech manufacturing in October, marking a resumption in sales after a two-month hiatus caused by Beijing’s restrictions. The controls on germanium, gallium and their chemical compounds, used to make parts for chips, telecommunications equipment and electric vehicles, were imposed on Aug. 1 on national security grounds, as China escalated its tit-for-tat trade war with the US and Europe. Another set of export controls on graphite, a key material for EV batteries, is due to come into force on Dec. 1. For germanium and gallium, Chinese exporters are now required to apply for licenses from the government and report details on their overseas customers and how the metals are used.
  • The OPEC+ meeting scheduled for this weekend looked to be running into trouble as Saudi Arabia expressed dissatisfaction with other members about their oil production levels. As of Wednesday morning, it looked like the OPEC+ conference could be delayed for an unspecified period of time, delegates said. Saudi Arabia, which has been making an additional 1 million barrel-a-day output cut since July, was in difficult talks with other members about their production levels, delegates said, asking not to be named because the discussions are private. The Organization of Petroleum Exporting Countries and its allies are looking at an increasingly bearish picture for oil prices. Crude is down 15% from its September peak to about $82 a barrel in London, defying expectations that production cuts would cause a rapid tightening in markets. The outlook for next year looks even weaker, with predictions of a first-half surplus if the cartel sticks to its current policies.
  • US mortgage rates dropped sharply, capping the biggest four-week slide in nearly a year and spurring a fresh round of applications to purchase homes. The contract rate on a 30-year fixed mortgage tumbled 20 basis points to 7.41% last week, data from the Mortgage Bankers Association showed Wednesday. The index of home-purchase applications increased 3.9% in the week ended Nov. 17, the most since June. Since reaching a 23-year high of nearly 8% in mid-October, mortgage rates have plunged nearly half a percentage point. The effective rate, which includes fees and compound interest, dropped to still-elevated 7.59%. In contrast, the five-year adjustable rate increased.
  • S&P Global Inc. expects to generate more revenue from rating private debt financings, as a potential downturn in credit markets spurs investors to seek more information about the risks their money managers are taking, the company’s finance chief said. The private credit market has grown to $1.6 trillion, up from around $500 billion at the end of 2015, according to Preqin, a data provider. Much of that growth has come in the past few years, and most investors in direct lending funds and similar vehicles haven’t seen their portfolios get hit in bad times, said Ewout Steenbergen, chief financial officer at S&P Global. When these limited partners, or LPs, see losses in their funds, they will probably demand that their money managers provide them with more information, Steenbergen said.