November 28, 2023

Daily Market Commentary

Canadian Headlines

  • Bank of Nova Scotia missed fiscal fourth-quarter profit estimates as the company set aside more money than expected for potentially souring loans. Provisions for credit losses totaled C$1.26 billion ($925 million), more than the C$870 million analysts had expected. The Canadian lender earned C$1.26 a share on an adjusted basis, it said in a statement Tuesday, short of the C$1.67 average estimate of analysts in a Bloomberg survey. The Toronto-based bank was hit by higher provisions for loan losses in both its Canadian and Latin American operations, which have been plagued by economic turmoil, and also reported lower capital-markets earnings as trading slowed in the quarter. The results come just two weeks before Scotiabank is set to unveil a revamped strategy under Chief Executive Officer Scott Thomson, who took charge at the bank in February and has promised to focus on profitable growth and delivering shareholder returns. But as he looks to put a longterm plan in place, he must navigate high expenses, slower loan growth in Canada and slumping results in Scotiabank’s international operations, where credit losses returning to pre-pandemic levels have dragged down its lending portfolios in Chile and Peru.
  • TC Energy Corp. boosted its outlook for the year, saying comparable Ebitda will be about 8% higher than 2022 after a strong October and a period of strength in the US dollar. The pipeline operator, which is having its investor day event on Tuesday, expects comparable Ebitda growth of 5% to 7% next year. That guidance excludes the impact of any asset divestitures and prior to the spinoff of its South Bow liquids and storage business. Later Tuesday: Convenience store operator Alimentation Couche-Tard Inc. reports earnings after the market close.

World Headlines

  • European shares retreated Tuesday, extending a pause in their November rally, as investors look to inflation data later in the week to gauge what’s next for monetary policy. The Stoxx Europe 600 Index was 0.5% down by 8:10 a.m. in London, with consumer and health care stocks faring the worst. Argenx SE sank 17% after the biotech company said a study of its only medicine failed to meet the primary endpoint. Stocks in the region are retreating for a second day, but remain on course for the best monthly return since January, with sentiment boosted by expectations interest rates have peaked. The positive trend for shares may continue, with more than 60% of respondents in the latest MLIV Pulse survey expecting stocks to provide better returns than bonds over the next month.
  • US equities were poised for a muted open while European stocks fell, with investors awaiting a series of speeches by Federal Reserve officials on Tuesday and key economic data later this week. S&P 500 futures are little changed to 4,559.50.
  • Asian equities, which have trailed developed-market stocks for most of this year, have a shot at outperforming in December if seasonality, valuations and technical indicators are any guide. The MSCI Asia Pacific Index has gained 3.4% in 2023, compared with a 16% advance in the MSCI World Index, leaving the Asian gauge’s price-to-earnings ratio 20% below that of the global developed-market one. At the same time, softening US inflation has raised hopes for an end to the Federal Reserve’s rate-hiking campaign, pressuring the greenback. A weaker dollar is seen as positive for growth in Asia’s emerging economies, many of which rely on imports priced in the currency. The Asian equity benchmark has delivered better average returns in December than the MSCI World gauge across five, 10 and 20-year periods, according to data compiled by Bloomberg. Technical studies such as the Relative Strength Index also suggest Asia may be poised for a rebound, according to Bhargava. The MSCI Asia Pacific measure’s 14-day RSI stands at 59.2 versus 71.4 of the MSCI World gauge.
  • Oil edged higher after a string of losses as the market weighed the possibility of deeper output cuts from OPEC+. Brent crude traded near $81 a barrel, reversing losses from previous sessions, with prices effectively treading water before a meeting of the producer group later in the week. OPEC+’s de-facto leader Saudi Arabia has asked other members to reduce their production quotas to shore up markets, although some members are resisting, delegates said. Crude has dropped by around a fifth since late September due to plentiful supplies and concerns about the global economic backdrop, putting pressure on the 23-nation alliance to intervene at its online meeting Thursday. The International Energy Agency warned earlier this month that markets would move back into surplus next year amid a dramatic slowdown in demand growth.
  • Gold steadied near its highest level since May, with the recent advance fueled by a slump in Treasury yields as traders loaded up on bets that the Federal Reserve will start cutting interest rates next year. Bond yields extended declines on Monday as investors increased wagers on deeper and more frequent rate cuts next year, pushing gold to a gain of 0.7%. Lower yields are typically positive for non-interest bearing bullion. The precious metal is holding above a support level of $2,010 an ounce after trending higher since Hamas’s attack on Israel in early October. Weaker US economic data and easing inflation has raised expectations that monetary loosening will come early next year.
  • Israel and Hamas extended their truce late Monday after agreeing to release more hostages and prisoners, and Washington said it was dispatching its top diplomat to the region for more talks over the conflict in Gaza. US Secretary of State Antony Blinken will visit Israel for the third time since Hamas attacked on Oct. 7, his office said, as he landed in Brussels for a NATO meeting. Bill Burns, director of the US’s Central Intelligence Agency, will meet Tuesday with his Israeli counterpart and Qatar’s prime minister to discuss a further truce extension, Axios reported. Israel and Hamas have agreed to pause fighting until early Thursday, extending their truce to six days. Blinken’s visit and US efforts have been focused on keeping the devastating conflict from spreading further in the Middle East.
  • Toyota Group companies plan to reduce their holdings in Denso Corp. by selling a roughly 10% stake in the supplier, Reuters reported Tuesday. The sale is likely to be worth about $4.7 billion and could be concluded by the end of this year, according to the report, which cited two people familiar with the matter it didn’t identify. Denso shares fell 4.9% in Tokyo, the biggest loss since September last year. Toyota is expected to remain Denso’s top shareholder after the sale, the report said. A collection of Toyota companies owns a combined 33.6% of Denso, according to data compiled by Bloomberg.
  • The recent sharp pullback in volatility as year-end approaches creates hedging opportunities given the cloudy outlook for equities, according to Goldman Sachs Group Inc. strategists. Wall Street’s “fear gauge” — the VIX volatility index — last week hit the lowest since the coronavirus pandemic. But investors continue to weigh risks to the outlook, ranging from geopolitics, next year’s busy elections calendar and the potential for shocks on the economic growth front, the team led by Christian Mueller-Glissmann wrote in a note dated Nov. 27. They note that three-month put spreads on the the S&P 500 are trading close to all-time lows. For longer investment horizons, they like equity collars — a strategy where near at-the-money puts are financed by selling out-of-the-money calls.
  • Researchers working inside a unit of BlackRock Inc. estimate that a reform of public financial institutions could free up as much as $4 trillion in additional investment to help emerging markets tackle the fallout of climate change. In a paper published on Tuesday, the BlackRock Investment Institute laid out how it thinks a reform of multilateral development banks (MDBs) such as the World Bank might allow them to make better use of the capital at their disposal. Doing so would play a key role in filling the so-called climate financing gap that emerging markets currently face, BlackRock said. The proposal comes just days before the COP28 climate summit gets underway in the United Arab Emirates. BlackRock Chief Executive Officer Larry Fink, who skipped the 2022 summit in Egypt, is on this year’s COP advisory committee and will be joining the talks in person in Dubai. The world’s largest asset manager has identified the global transition to a low-carbon economy as one of five “mega forces sweeping markets and economies.”
  • Russia’s weekly seaborne crude exports rebounded before a meeting of OPEC+ oil minsters, which has been delayed by disagreements within the group over individual output targets. About 3.24 million barrels a day of crude was shipped from Russian ports in the week to Nov. 26, tanker-tracking data monitored by Bloomberg show. That was up by 370,000 barrels a day from the revised figure for the period to Nov. 19, even though tanker loading in the Black Sea was disrupted by storms. Four-week average flows slipped. The OPEC+ group of oil producers, jointly led by Russia and Saudi Arabia, are due to meet virtually on Nov. 30 to set output targets for the first part of next year. The group was forced to postpone its scheduled gathering after some African members objected to lower output targets that were pressed on them back in June. Saudi Arabia is now asking others in the OPEC+ coalition to reduce their oil-output quotas further in a bid to shore up global markets, according to people familiar with the discussions.
  • UK inflation is becoming more “home-grown” and will be “challenging to squeeze out of the system,” according to Bank of England Deputy Governor Dave Ramsden. Speaking in a Bloomberg TV interview from Hong Kong, Ramsden said monetary policy would have to stay “restrictive for an extended period of time” in order to get inflation back down from 4.6% to the 2% target. That’s despite BOE forecasts which show a bleak growth outlook for the economy, with a 50-50 chance that it will dip into a recession. Ramsden pointed out that headline consumer prices inflation is currently less than half of what it was a year ago. “But that’s been driven down by a bigger fall in the energy component than we were expecting,” he said.
  • Goldman Sachs Group Inc. Chief Executive Officer David Solomon argued recent proposals by regulators to force banks to hold more capital won’t make the world’s financial system any safer and could impact everything from flight prices to pensioners’ retirement savings. The proposed rules — which the Federal Reserve, Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency unveiled in July — would require the biggest US banks to set aside more capital for a variety of different businesses. Solomon said one area that would be impacted would be uncollateralized derivatives, which he said airlines often use to hedge the price of jet fuel so they can have stability in their pricing. Under the proposed rules, “the cost of that goes way up,” Solomon said during a panel at a Financial Times banking conference in London. “I don’t think you’re materially changing the safety and soundness in the way that matters compared to the friction and cost.”
  • While the US stock market is on pace for one of its best Novembers in decades, a key market barometer that tracks the S&P 500 Index has lingered in a moderate growth phase for months. So, what would need to changed to finally trigger it to flip more bullish? A policy reversal from the Federal Reserve.  A Bloomberg Intelligence model known as the Market Regime Index — which clusters periods into three phases dubbed accelerated growth (green), moderate growth (yellow) and decline (red) — has remained stuck in the middle for the past nine months. That suggests that equity-return expectations should remain average until the Fed shifts away from raising interest rates to cutting them, according to BI’s chief equity strategist Gina Martin Adams and senior associate analyst Gillian Wolff.
  • Some of Europe’s junk borrowers are holding off for as long as possible before forking out to refinance debt in the new era of high rates. The rapid rise in interest rates means non-investment grade companies that issued bonds at 2% to 4% are now facing refinancing costs that have trebled in some cases. Such borrowers are playing a waiting game, though that comes with risks given the disruptions seen in funding markets this year. “Bond issuers are waiting around a bit more, versus going now and resetting their cost of capital,” said Luke Gillam, head of EMEA credit finance capital markets at Goldman Sachs Group Inc. “If you are performing well, you do nothing — you can afford to do so. If you are performing less well you are likely to be more proactive.”
  • A spate of attacks on merchant shipping near Yemen and Somalia, likely triggered by the war in Gaza, have prompted the US to warn vessel operators to be extra careful when navigating the region. On Nov. 19, Houthis seized of the Galaxy Leader car carrier while a Liberia-flagged chemicals tanker was targeted over the weekend. Both have an Israeli connection. At the same time, there have also been at least four other suspicious approaches to ships in the Indian Ocean in the past few weeks — many of them taking place in the Red Sea or the Gulf of Aden — according to the UK navy. “Exercise caution when transiting these areas and remain cognizant of evolving threats in this region,” the US Department of Transportation Maritime Administration, or Marad as it’s better known, said in an alert on Monday.
  • Fast-fashion retailer Shein has filed confidentially with US regulators for an initial public offering that could take place next year, according to a person familiar with the matter. The online retailer, which was founded in China but is now headquartered in Singapore, is working with Goldman Sachs Group Inc., JPMorgan Chase & Co. and Morgan Stanley on the listing, said the person, who asked not to be identified because the filing wasn’t public. Representatives for Shein, JPMorgan and Morgan Stanley declined to comment. A spokesperson for Goldman Sachs didn’t immediately respond to a request for comment. The filing was reported earlier by Shanghai Securities News.