November 29, 2023

Daily Market Commentary

Canadian Headlines

  • Canadian media companies are caught in the middle of a standoff between Silicon Valley and Prime Minister Justin Trudeau’s government, with their audiences unable to access news on some of the world’s most popular social media platforms. The government passed a law to try to force Meta Platforms Inc. and Alphabet Inc.’s Google to pay publishers in return for linking to news stories, an attempt to boost an industry that has suffered from massive losses of advertising revenue. The big technology firms are pushing back hard. Meta has blocked all links to news content in Canada on Facebook and Instagram to avoid making payments; Google has threatened to remove news from search results. But the stalemate is battering entrepreneurial news outlets that relied on Facebook to reach their communities, including small organizations that are sometimes the only providers of local news in rural parts of Canada. It’s a warning of the possible consequences for other governments in the US, UK and elsewhere pursuing similar legislation to aid journalism.
  • Panama’s government said it will shut a $10 billion copper mine owned by First Quantum Minerals Ltd., damping hopes that the company might reach a new deal to keep operating after a supreme court ruling against it. Authorities will start “the transition process for the orderly and safe closure of the mine,” President Laurentino Cortizo said in a post on X Tuesday. He didn’t say how long the process might take. Production had already been halted after protesters blocked supplies from reaching the mine. The announcement caps a dramatic six weeks in Panama, after widespread protests erupted over a decision to approve a new multi-decade operating contract for First Quantum’s mine. Cortizo initially shocked investors by announcing a referendum on the project, but then backtracked to await a ruling from the Supreme Court. On Tuesday, the court unanimously ruled the law approving the contract was unconstitutional.

World Headlines

  • European stocks gained as the latest inflation data showed a decline across the region, following a subdued start to the week’s equity trading. Koninklijke Philips NV slumped after a new safety issue involving its sleep apnea machines. The Stoxx Europe 600 gained 0.5% by 10:13 a.m. in London. Autos rose the most, with real estate and technology stocks — which benefited from falling bond yields — also among the leading gainers. Meanwhile, Kindred Group Plc plunged after third-quarter profit missed estimates, while Vestas Wind Systems A/S climbed after Berenberg lifted its rating on the stock to buy from hold. European stocks are headed for the best month since November as bond yields dropped amid hopes central banks are done hiking interest rates. Concerns about economic growth and slowing earnings still linger, with JPMorgan Chase & Co.’s Mislav Matejka seeing “spells of material weakness” in the first half of 2024 before a potential improvement.
  • Stocks advanced and Treasuries extended their November rally as expectations grew that the Federal Reserve is done with policy tightening and may start cutting interest rates next year. Bonds are climbing at the fastest monthly pace since 2008 as inflation continues to slow and Fed officials strike a dovish tone. Now, traders are looking ahead to data on Thursday that include the Fed’s preferred measure of underlying inflation, and a speech by Fed Chair Jerome Powell at the end of the week that could offer clues on potential policy easing.
  • Oil added to its biggest gain in a week as traders counted down to a high-stakes OPEC+ meeting on supply, and weighed signs that the Federal Reserve is done raising interest rates. Global benchmark Brent climbed above $82 a barrel, after rallying by more than 2% on Tuesday. Prices firmed on expectations across markets that the Fed has finished with policy tightening and may start cutting borrowing costs next year, with recent dollar weakness also providing support. The price move pulled oil out of a holding pattern ahead of an OPEC+ meeting that’s set to take place Thursday. The producer group is due to meet online and set policy for 2024, but has yet to resolve a dispute over output quotas for some African members, according to delegates.
  • Gold steadied after hitting the highest since May, as comments from Federal Reserve officials bolstered bets that policymakers will start cutting interest rates next year. The dollar and Treasury yields remained under pressure after Governor Christopher Waller, one of the most hawkish Fed officials, on Tuesday said policy is well positioned to return inflation to a 2% target, suggesting interest rates may not need to rise again. Lower borrowing costs are typically positive for non-yielding bullion. Gold has rallied about 13% since early October, initially fueled by haven buying in the wake of the Israel-Hamas conflict. It’s now within sight of the record high set during the pandemic, supported by a drop in the yields paid by global bonds that are on track for their best month since 2008.
  • Billionaire investor Bill Ackman is betting the Federal Reserve will begin cutting interest rates sooner than markets are predicting. The Pershing Square Capital Management founder said such a move could happen as soon as the first quarter. Traders are fully pricing in a rate cut in June, with the chance of a cut happening in May priced at about 80%, according to swaps market data. The Fed began aggressively raising rates in March 2022, leading to the fastest pace of rate increases in 40 years. The central bank has yet to cut rates even as US inflation has broadly slowed this year. Ackman said that if the Fed keeps rates in the roughly 5.5% range when inflation trends below 3%, “that’s a very high real rate of interest.”
  • Saudi Arabia has approached Iran with an offer to boost cooperation and invest in its sanctions-stricken economy if the Islamic Republic stops its regional proxies from turning the Israel-Hamas war into a wider conflict. The proposal has been delivered directly and through multiple means since Hamas’s attack on Israel last month and the ensuing war in Gaza, according to Arab and Western officials familiar with the matter. The possibility of a deeper engagement also came up in the encounter between Iranian President Ebrahim Raisi and Saudi Crown Prince Mohammed Bin Salman during a summit in Riyadh this month to address the war, said the people, speaking on condition of anonymity to discuss the sensitive talks. Raisi was among the first leaders that MBS, as the crown prince is known, spoke with after the Hamas attack.
  • The London Metal Exchange won a UK court challenge by Elliott Investment Management over its controversial decision to halt a runaway short squeeze in the nickel market last year, removing one of the biggest threats facing the LME as it seeks to move past the crisis. Challenges by both Elliott and trading firm Jane Street were dismissed, according to a ruling on Wednesday. The judges said the exchange’s executives should be granted wide discretion to make the urgent decisions that they did. The LME was catapulted into the global spotlight last March and drew widespread criticism after it suspended the nickel market and retroactively canceled $12 billion of trades. Elliott sought to have the cancellation declared unlawful, claiming the decisions cost it more than $450 million. The hedge fund said it intends to appeal the court loss, while Jane Street said it will evaluate its next steps.
  • General Motors Co. will boost its dividend by 33% and repurchase $10 billion of shares — its biggest-ever buyback plan — sparking renewed interest among investors in a stock that has slumped this year as the company’s technology investments have faltered. The automaker is also reinstating 2023 earnings guidance to levels modestly below what it gave before a six-week United Auto Workers strike cut into profits. GM said net income will now be between $9.1 billion and $9.7 billion, compared to the previous range of $9.3 billion to $10.7 billion. During the strike, the company withdrew guidance. The Detroit-based manufacturer is spending on the new investor incentives despite high interest rates that are threatening car sales and capital burdens from its electric-vehicle effort, which has yet to show significant results. GM is trying to prove to shareholders that it can generate huge amounts of cash while still investing in technology, hoping to lift a stock that trades lower today than when Chief Executive Officer Mary Barra took over in early 2014.
  • The world’s advanced economies are heading into a deepening slowdown as markedly higher interest rates take a hefty toll on activity that could still become more acute, the OECD warned. Growth is losing momentum in many countries and won’t edge up until 2025, when real incomes recover from the inflation shock and central banks will have begun cutting borrowing costs, the Paris-based organization said. It forecasts global gross domestic product to expand only 2.7% next year after an already weak 2.9% in 2023. The pace will only pick up to 3% in 2025, according to the assessment. Moreover, the OECD said the risks to the forecast are tilted downwards amid heightened geopolitical tensions, an uncertain outlook for trade, and the risk that tight monetary policy could hurt firms, consumer spending and employment more than expected.
  • US mortgage applications for home purchases increased for a fourth week, the longest stretch of gains since March that was aided by a further easing in borrowing costs. The Mortgage Bankers Association’s index of purchase applications rose 4.7% to a two-month high of 144.9 in the week ended Nov. 24. The contract rate on a 30-year fixed mortgage fell four basis points to 7.37%, the lowest since mid-September. While mortgage rates have declined since approaching 8% about a month ago, borrowing costs remain at levels last seen in 2000. That’s discouraging many homeowners who have locked in much-lower rates from moving, limiting the number of listings and keeping home prices high.
  • A US retreat has resulted in an overall decline in the global market for ESG investing. That’s according to the latest assessment by the Global Sustainable Investment Alliance (GSIA), which provides updates on the size of the market every two years. The 2022 review, published on Wednesday, shows that investors had $30.3 trillion in sustainable assets, down from $35.3 trillion in 2020. In the US, where high-profile Republicans have railed against ESG, investments in sustainable assets plunged to $8.4 trillion last year from just over $17 trillion two years earlier. The drop was attributed largely to a change in methodology used to calculate the numbers.
  • Ukrainian President Volodymyr Zelenskiy called for a faster buildup of major defensive lines amid Kyiv’s stalled counteroffensive and concerns that Russia could attempt to take more territory. Zelenskiy urged greater speed and efficiency in building defenses in a video statement on Telegram after a meeting with key military and security officials Tuesday evening. He encouraged local communities to pitch in and pledged to make money available for the effort. Ukraine’s counteroffensive stalled over the past months as Kyiv’s troops became bogged down trying to penetrate thick lines of defense built by Russia that include minefields and trench systems stretching for miles. Russian President Vladimir Putin has been keeping up the military pressure by sending more soldiers to the frontlines despite heavy casualties.
  • Germany has a potential hole in its 2024 budget of as much as €24 billion ($26.4 billion), though the exact figure is still very much up in the air, according to a senior lawmaker from Chancellor Olaf Scholz’s ruling coalition. The government in Berlin has been forced to overhaul its finance planning due to this month’s bombshell judgment by Germany’s top court, which called into question the practice of using special funds. As things stand, billions of euros must be shifted into the regular federal budget next year without breaking rules that restrict net new borrowing. At the same time, he poured cold water on calls from the FDP’s coalition partners — Scholz’s Social Democrats and the Greens — to trigger an emergency suspension of the borrowing limit, known as the debt brake, for a fifth straight year in 2024.
  • As the truce between Israel and Hamas enters its final 24 hours, negotiators from Qatar, Egypt and the US are pressing for an extension to try to secure the release of additional captives and avert a resumption of a war that erupted almost two months ago. Just hours after Hamas turned over 12 more hostages — 10 Israelis and two Thai citizens — to the Red Cross, US President Joe Biden called for an end to the fighting and stepped up criticism of the group, saying it feared nothing more than Israelis and Palestinians living side-by-side in peace. The fragility of the six-day cease-fire was underlined by a flare-up in northern Gaza on Tuesday, with the Israel Defense Forces saying some of its soldiers were slightly wounded in three separate explosions and an ensuing exchange of fire. A Hamas official who is a spokesman for its military wing said “a field clash” occurred after Israeli troops violated the terms of the cease-fire arrangement. He didn’t elaborate.
  • Global bonds are soaring at the fastest pace since the 2008 financial crisis. A Bloomberg gauge of global sovereign and corporate debt has returned 4.9% in November, heading for the biggest monthly gain since it surged 6.2% in the depths of the recession in December 2008. November’s rally is being driven by increasing speculation the Federal Reserve and its global peers have largely finished hiking interest rates and will start cutting next year. Markets price a full percentage point of reductions in the US next year, with the cycle starting in June. Fed Governor Christopher Waller helped bolster rate-cut bets on Tuesday, when he said the current level of policy looks well positioned to slow the economy and bring down inflation. Some investors, including billionaire Bill Ackman, say the easing will start even earlier than traders anticipate.
  • No one expected the transition from fossil fuels to be easy. But a year after President Joe Biden’s landmark climate law promised billions of dollars for America’s switch to clean energy, some of the nation’s most ambitious renewable power projects have been shelved, electric car sales are missing targets and investors are fleeing the sector in droves. The result is a $30 billion collapse in US clean energy stocks in the last six months—a market many investors expected to flourish in the aftermath of the law’s passage. Few industries have been unscathed by soaring interest rates, but perhaps none has been harder hit than renewable energy. For a sector that builds big, expensive facilities such as solar plants and wind farms, high rates cut profit margins enough to sink projects and bankrupt companies. The giddy enthusiasm that followed the Inflation Reduction Act’s passage evaporated, wiping out a quarter of the market value of US companies in the S&P Global Clean Energy Index in the six months ended Nov. 27.
  • KKR & Co. will pay about $2.7 billion in cash to acquire the remaining 37% of Global Atlantic that it doesn’t already own, broadening its bet on insurance to fuel asset and fee growth. The buyout giant will fund the purchase from its balance sheet, which had $23 billion of cash and investments as of Sept. 30, KKR said Wednesday in a statement. The transaction, along with a series of “strategic initiatives,” is expected to boost after-tax distributable earnings per share by about 10% in 2024, according to a separate presentation. The acquisition gives KKR access to Global Atlantic’s retail distribution platform, which benefits its growing wealth business, and it creates opportunities for the firm’s capital markets unit, he said.
  • Jack Ma urged Alibaba Group Holding Ltd. to correct course in a surprise internal memo, in which the billionaire called for fundamental change across the company he co-founded decades ago. Ma, who has mostly stayed away from day-to-day operations since 2020, stunned employees Wednesday by replying to a staff post on Alibaba’s internal forum. In his brief message, the entrepreneur praised decisions taken in recent years by rival PDD Holdings Inc. to wrest market share from China’s e-commerce leader. But Ma was convinced Alibaba will change and “correct its course,” he said in a post confirmed by people familiar with the forum. Alibaba, once China’s best candidate to become a trillion-dollar company, is trading near its lowest value this year, at a fraction of its peak in 2020. The company is navigating turmoil both internally and externally, as a weaker-than-anticipated economic recovery and up-and-coming rivals such as PDD and ByteDance Ltd. undermine its once-dominant online retail business.