November 29, 2022

Daily Market Commentary

Canadian Headlines

  • Royal Bank of Canada agreed to buy HSBC Holdings Plc’s Canadian unit — the country’s seventh-largest bank — for C$13.5 billion ($10 billion) in cash, expanding its roster of business clients and bulking up its retail presence on the West Coast. The deal is expected to be completed by late 2023, subject to regulatory approvals, Toronto-based Royal Bank said in a statement Tuesday. The purchase gives Royal Bank about 130 more branches, including about 45 in the West Coast province of British Columbia. The company also gains a significant commercial-banking franchise, with many of the clients in industries that trade and bank internationally. “HSBC Canada offers the opportunity to add a complementary business and client base in the market we know best and where we can deliver strong returns and client value,” Royal Bank Chief Executive Officer Dave McKay said in the statement. “This also positions us as the bank of choice for commercial clients with international needs, newcomers to Canada and affluent clients who need global banking and wealth-management capabilities.”
  • Suncor Energy Inc., the Canadian oil sands producer under pressure from activist investor Elliott Investment Management LP, said it decided to retain its Petro-Canada retail unit after a review. Suncor said Tuesday in a statement it will work on improving the unit, which one analyst had said could bring after-tax proceeds of almost C$9 billion ($6.7 billion) in a sale. That process will include “continued optimization of the Petro-Canada retail sites across the network,” it said. The chain holds about 18% of Canadian fuel retail sales. “Petro-Canada is a unique, differentiated, and strategic asset due to its strong national network and best in market consumer brand and loyalty program,” Chair Mike Wilson said in a statement. Suncor has been making changes ever since Elliott went public in April with its campaign to overhaul management, refresh its board and improve performance. The investment firm, founded by Paul Singer, has been critical in particular of Suncor’s safety record following a series of deadly incidents that contributed to lost crude output and weak returns compared with other Canadian oil sands companies.
  • Bank of Nova Scotia got a boost from its domestic operations in its fiscal fourth quarter as Canadian businesses ramped up borrowing. Revenue in the Canadian banking unit rose 11% to C$3.13 billion ($2.33 billion) in the quarter ended Oct. 31, the Toronto-based company said Tuesday. Overall profit topped analysts’ estimates. Canadian businesses have borrowed heavily in recent quarters to rebuild inventories and meet customer demand. The Latin America-focused international division also posted higher revenue and profit, helped by widening lending margins. Scotiabank shares have fallen 20% this year, compared with a 7.4% decline for the S&P/TSX Commercial Banks Index.

World Headlines

  • European stocks gained on Tuesday amid investor optimism that China will further relax its Covid restrictions after weekend protests, opening its economy. The Stoxx 600 Index rose 0.2% by 9:04 a.m. in London. Energy and miners outperformed as oil and metals climbed on China news. Chemicals underperformed. Signs of the reopening in China are adding to recent investor optimism around European stocks, which have rallied on bets that easing inflation would lead to a dovish tilt in central bank policy. The benchmark Stoxx 600 Index is on course for a second monthly gain for the first time since August 2021, but strategists warn that stocks could come under pressure again amid the specter of a recession.
  • US equity futures pointed to a stronger open on Wall Street as speculation mounted that unrest in Chinese cities over Covid restrictions would force authorities to move faster in loosening the curbs.  Futures for the tech-heavy Nasdaq rose 0.5%, while those on the S&P 500 were also up, after the underlying indexes fell about 1.5% on Monday. US-listed Chinese stocks, such as Alibaba Group Holding Ltd. and rallied in premarket trading, while the exchange-traded KraneShares CSI China Internet Fund rose more than 6%, following on from Asian markets’ sharp bounce earlier in the day. Another tailwind for stocks is the likelihood that the Federal Reserve will move to a slower rate-hiking pace, with Fed Chair Jerome Powell seen cementing those bets when he speaks on Wednesday. That view, alongside the easing in China tensions, pushed the dollar lower against a basket of peers, following two days of gains.
  • Asian equities rose as latest official commentary in China bolstered reopening trades, with a weaker dollar adding to tailwinds for the region. The MSCI Asia Pacific Index extended its advance to as much as 1.7% in afternoon trading, with gauges in Hong Kong jumping more than 5% to lead gains in the region. In a briefing, Chinese officials urged elderly vaccination and avoidance of excessive restrictions, which added to reopening optimism. Beijing’s additional support for developers also buoyed stocks. A decline in the dollar boosted benchmarks in South Korea, Taiwan and India, although measures in Japan fell. Consumer discretionary and telecom shares were the biggest sectoral advancers in the region.
  • Oil rose as China refined its approach for dealing with Covid-19 after widespread protests against strict curbs, and investors looked ahead to an OPEC+ meeting that may see a supply cut to counter market weakness. West Texas Intermediate gained above $79 a barrel, reversing an earlier drop. Beijing said it would bolster vaccination among seniors, a move regarded by health experts as crucial toward reopening the economy. Prices were whipsawed on Monday following unrest in the world’s top crude importer at the weekend. The Organization of Petroleum Exporting Countries and its allies including Russia may consider supply cuts when members meet to assess output policy this weekend, potentially deepening curbs agreed the last time members convened in October. The gathering precedes a deadline for European Union curbs on Russian flows as the bloc struggles to agree on a price cap.
  • Gold advanced as a weaker dollar supported the metal, spurred by an apparent easing of unrest in China over Covid curbs. Protests in China dissipated on Monday night after authorities responded with a heavy police presence and a quiet loosening of some Covid measures. The country is pushing for greater vaccination of the elderly, helping drive speculation about a further relaxation of rules. Gold has rebounded over 7% this month as the greenback fell from a recent peak. That’s helped it recoup some losses after dropping for seven straight months due to the Federal Reserve’s relentless rate hikes.
  • The unusually wide gap between the two main US inflation gauges is poised to narrow in the months ahead, giving Federal Reserve officials more cover to pause interest-rate increases in early 2023. Over the last several months, annual inflation as measured by the consumer price index has exceeded that of the personal consumption expenditures price gauge by the most since the early 1980s. Excluding food and energy, the difference in so-called core inflation is also the widest in decades. Data out Thursday are forecast to show the core PCE price index, which the Fed counts as a preferred inflation gauge, decelerated in October to 5% from a year earlier. Core CPI, which came out earlier this month, cooled to 6.3%.
  • Billionaire Guo Guangchang’s Shanghai Fosun Pharmaceutical Group Co. is considering a sale of Indian drugmaker Gland Pharma Ltd. after receiving interest from potential buyers, people familiar with the matter said. Fosun Pharma, a listed arm of Chinese conglomerate Fosun International Ltd., has been working with an adviser as it informally gauges interest in its controlling stake in Gland, the people said. Companies in the industry and buyout firms are in the early stages of studying the business, the people said, asking not to be identified because the matter is private. Shares of Gland climbed 7.6% in Mumbai on Tuesday, their largest increase in more than a year. They have fallen about 51% this year, giving the company a market value of $3.8 billion. Fosun Pharma shares in Hong Kong rose 4.9%.
  • Bridgepoint Group Plc is in talks to acquire Energy Capital Partners, according to people with knowledge of the matter. Bridgepoint is discussing buying ECP for about $1 billion in cash and stock, said one of the people, all of whom asked not to be identified because the information is private. While negotiations are advanced, a transaction hasn’t been finalized so terms may change and talks could still fall apart. ECP, led by founder Doug Kimmelman and managing partners Pete Labbat and Tyler Reeder, was founded in 2005 and has invested in energy-transition and infrastructure assets. Its holdings include a portion of Calpine Corp., which describes itself as the largest US generator of electricity from natural gas and geothermal resources. ECP, which has roughly $14.4 billion under management according to data compiled by Bloomberg, counts Blue Owl Capital Inc.’s Dyal Capital as a minority stakeholder.
  • The dollar looked unstoppable earlier this year when investors were adding to bets on inflation and US rate hikes. Now they’re turning against it in droves. Former bulls including JPMorgan Asset Management and Morgan Stanley say the era of dollar strength is ending as cooling prices spur markets to trim bets on further Federal Reserve tightening. That may spell buying opportunities for the currencies of Europe, Japan and emerging markets. “Markets now have a better grasp of the Fed’s trajectory,” said Kerry Craig, a strategist in Melbourne at JPMorgan Asset, which oversees $2.5 trillion. “The dollar is no longer the straight, one-way buy we’ve seen this year. There’s room for currencies like the euro and yen to recover.”
  • Worries about contagion from the implosion of digital-asset exchange FTX clouded a rise in Bitcoin and other cryptocurrencies Tuesday. The largest token rose as much as 2.1% and was trading at about $16,485 as of 10:23 a.m. in London. Second-ranked Ether also posted gains, while meme token Dogecoin surged 10% at one point. Bitcoin has so far mostly weathered BlockFi Inc.’s bankruptcy on Monday. The crypto lender unraveled in the wake of the chaotic demise of Sam Bankman-Fried’s FTX and sister trading house Alameda Research. The crypto world is now nervously watching for further fallout from FTX, with the spotlight trained on the likes of struggling brokerage Genesis.
  • Airbus SE Chief Executive Officer Guillaume Faury said supply constraints will persist until the end of next year as he revealed the full extent of the crisis gripping the firm’s multitude of component producers. Soaring inflation and energy bills, raw-material shortages, a labor squeeze and disruption to Chinese parts makers amid continuing coronavirus lockdowns are combining to extend disruption, Faury said at a conference in Brussels Tuesday. While some issues have eased, such as an engine shortage that left two dozen otherwise flight-ready aircraft waiting on turbines earlier this year, Faury reeled off a list of problems still afflicting production. The supply squeeze comes as Toulouse, France-based Airbus races to meet an already reduced annual delivery goal of 700 jets in the final few weeks of 2022.
  • Goldman Sachs Group Inc. is shifting some of its euro swaps trading desk to Milan from London, the latest example of roles moving to the continent after Brexit. The Wall Street giant is relocating staff as it bolsters European offices in the wake of the UK’s departure from the European Union, according to people familiar with the matter. Staff will likely move early next year and Goldman will also be hiring staff locally, two of the people said. Some of the world’s biggest banks are under pressure to move more traders from London into EU cities such as Paris, Frankfurt and Amsterdam. The European Central Bank said in May that lenders who set up units in the euro area are still too dependent on operations outside the region, and found that about a fifth of the trading desks it reviewed “warranted targeted supervisory action.”
  • The top bosses at Kroger Co. and Albertsons Cos. are headed for a round of tough questions from US senators skeptical of their $24.6 billion deal to create a supermarket giant rivaling Walmart Inc. in heft. Kroger Chief Executive Officer Rodney McMullen and his counterpart at Albertsons, Vivek Sankaran, will get a chance to take on their critics Tuesday afternoon before the Senate Judiciary Committee’s antitrust panel. The appearance will be their highest-profile defense of the tie-up since they announced Oct. 14 that Kroger would buy Albertsons. The hearing, scheduled for 3 p.m. in Washington, will refocus the spotlight on a combination that has sparked opposition from lawmakers, labor unions and consumer groups. Although Congress doesn’t have an official role in approving the deal, the Senate panel’s two leaders — Minnesota Democrat Amy Klobuchar and Utah Republican Mike Lee — have expressed “serious concerns” about the transaction. Other lawmakers have also expressed misgivings.
  • Italy’s new government is reviewing options for retaining oversight of ITA Airways as part of a possible deal with Deutsche Lufthansa AG, backing away from the previous administration’s willingness to cede control of a strategic asset. Options under review by Prime Minister Giorgia Meloni’s government include seeking special powers to influence or veto governance or strategy of ITA following the sale of a stake to Lufthansa, or partnering with state-railway company Ferrovie dello Stato Italiane SpA, or FS, according to people familiar with the talks, asking not to be identified discussing confidential deliberations. The option of bringing the state-owned railway on board could let Italy keep a majority in the airline, the people said. While a partnership with FS would allow Italy to bolster its oversight of the company after a sale, the move might deter Lufthansa, which has signaled it would be willing to explore a deal only if the German airline gains control of its Italian rival, the people added.
  • Carmakers are opting to shutter their plants in China as Covid restrictions make it almost impossible to secure some components, deeming even the closed-loop systems promoted by officials as a way to maintain manufacturing during lockdowns untenable. Volkswagen AG on Monday said a component shortage was the main reason behind a decision to halt production at a joint venture plant that it has with China FAW Group Co. in Chengdu and two of five production lines at its factory in Changchun. The German automaker doesn’t have an estimate for when output will resume and has no plans to create closed loops, a spokesperson said. The unpredictability of China’s restrictions, especially as outbreaks reach record levels, means automakers such as VW are currently confronted with significant supply-chain uncertainties, people familiar with the situation said, asking not to be identified because they’re not authorized to speak publicly.
  • Qatar has agreed to supply Germany with liquefied natural gas under a long-term deal that will go a small way to helping the European country replace piped flows from Russia. State-owned Qatar Energy and ConocoPhillips have signed agreements that will see the Persian Gulf state send up to 2 million tons of LNG a year to Germany from 2026. The deals will last at least 15 years, Qatar’s energy minister, Saad al Kaabi, told reporters in Doha alongside Ryan Lance, ConocoPhillips’ chief executive offer. Germany has been one of the worst hit European nations after a reduction in supplies of gas from Moscow. The nation which used to get more than a half of its gas via pipelines from Russia, has rented five floating LNG terminals which it will rely on in future. Closing a deal now means further diversification of LNG sources, key for Germany to go through this and next winter.
  • Banks in the US and Europe with around $42 billion of buyout debt stuck on their balance sheets are making the most of their last chance to get rid of it this year. Stabilization in the leveraged loan and high yield bond markets has led to an opening for deals — including for bonds and loans tied to the buyout of TV ratings business Nielsen Holdings Plc — as banks try to reduce debt on their balance sheets before the holidays. Offloading the so-called hung debt, even at steep discounts, confines losses to this financial year while also appeasing risk departments and regulators. There may be more to follow. A group of lenders including Goldman Sachs Group Inc. is nearing an agreement to sell €1.5 billion ($1.56 billion) of a junk loan backing the buyout of Unilever’s tea business, while other deals could also come before the year end.
  • Chinese health authorities struck a conciliatory tone a day after protests against stringent Covid curbs were stymied by a heavy police presence, social media censorship and quiet pandemic concessions. Personal requests and questions about how the virus is being handled should be resolved in a timely manner, officials from the National Health Commission said on Tuesday, after some measures implemented at the local level triggered confusion and angst. Excessive curbs should be avoided, they said, even as the virus continues to spread. The unrest that flared up over the weekend stems from random lockdowns, ignoring residents’ requests and excessive implementation of Covid controls, rather than the controls themselves, said Cheng Youquan, an official with the nation’s top health agency. China must reduce the inconvenience caused by the outbreak, authorities said during a briefing that focused on the complaints and the need to boost vaccination rates, especially among the elderly.
  • AMC Networks Inc. said Christina Spade has stepped down as chief executive officer, an abrupt departure less than three months after she took the top job. The television-channel company’s board “is currently finalizing who it will name as a replacement,” according to a statement Tuesday. No reason was given for Spade’s departure. The change continues a leadership revolving door. AMC, known for its namesake cable channel along with brands such as IFC and SundanceTV, had been run by Josh Sapan before a similarly abrupt exit last year. Matt Blank served as interim CEO before Spade, AMC’s former chief operating officer and chief financial officer, was named the top executive effective Sept. 9.
  • For years, only one customer mattered in the market for lithium and other metals used in electric vehicle batteries: Tesla Inc. The prospect that a new mine might end up feeding Elon Musk’s automaker was enough to sway cautious lenders to finance a project or convince investors that untested operations had a shot at meeting aggressive sales projections. And as the biggest buyer in a sector full of startup miners, Tesla wielded unusual power to dictate terms, typically locking in agreements for supplies for years at fixed prices. Tesla, by contrast, has resisted partnering with suppliers in developing new operations, and Musk has repeatedly rejected proposals to acquire lithium companies or mines to lock in supplies, according to people familiar with his thinking. The increased competition has emboldened miners and refiners and is exposing Musk’s reluctance to adapt his strategy, posing a new threat to Tesla’s plans to boost production, reduce costs and establish its own lithium refinery in Texas, according to the people, who requested anonymity to discuss private matters.

*All sources from Bloomberg unless otherwise specified