November 3, 2022

 

Daily Market Commentary

Canadian Headlines

  • Prime Minister Justin Trudeau’s government will propose a tax on corporate stock buybacks in an effort to encourage companies to invest in domestic operations and workers, Canadian Press reported.  The story, which cited an unnamed government official, didn’t elaborate on the plan, which will be part of Finance Minister Chrystia Freeland’s budget update to be released on Thursday. A government official told Bloomberg News the report was accurate, without providing additional details. Officials at the prime minister’s office weren’t immediately available for comment. Canada’s move follows the US, which imposed a 1% excise tax on corporate share buybacks as part of the Inflation Reduction Act signed into law by President Joe Biden this summer.
  • Barrick Gold Corp.’s boss says the world’s No. 2 bullion producer is looking for opportunities to buy other miners but isn’t seeing many appealing choices. The Toronto-based firm’s keeping “a sharp lookout for M&A opportunities, but those that could pass our strict investment filters are few and far between,” Chief Executive Officer Mark Bristow said in an earnings report Thursday, which beat estimates for a 13th straight quarter. Bristow has long called for consolidation in the gold business, but says that deals are tough to find. “It’s not easy to find value” in potential takeovers, he told Bloomberg last August.
  • A multimonth slide in Toronto home prices slowed in October, as sellers stepped back in hope the market will improve if they wait. The benchmark price for a home in Canada’s largest city fell 1.1% in October to C$1.1 million ($802,217) according to data released Thursday by the Toronto Regional Real Estate Board. That’s the smallest decline in the seven straight months of price drops, bringing total losses to 17.7% on a non-seasonally adjusted basis, the data show. Some homeowners appear to be delaying putting their homes on the market as a result. New listings in Toronto fell 11.6% in October from last year, reaching a level for that month not seen in 12 years, according to real estate board data. But the number of sales was still down much more, 49.1%, in the same period.
  • Canada’s government ordered three Chinese firms to divest from a trio of small lithium miners based in the country, days after introducing tougher rules on foreign investments in the nation’s critical minerals sectors. Sinomine (Hong Kong) Rare Metals Resources Co. Ltd. is required to divest in Vancouver-based Power Metals Corp., while Chengze Lithium International Ltd. must exit from Calgary-based Lithium Chile Inc. and Zangge Mining Investment (Chengdu) Co. Ltd., was ordered to divest from Ultra Lithium Inc., based in Vancouver, Canada’s federal government said Wednesday in a statement. “These companies were reviewed via the multi-step national security review process, which involves rigorous scrutiny by Canada’s national security and intelligence community,” Canadian Industry Minister Francois-Philippe Champagne said in the statement. “The government’s decisions are based on facts and evidence and on the advice of critical minerals subject matter experts, Canada’s security and intelligence community, and other government partners.”

World Headlines

  • European equities declined after Federal Reserve Chair Jerome Powell suggested rates will go higher than previously expected while the Bank of England raised interest rates by the most in 33 years. The Stoxx Europe 600 fell 1.2% at 12:09 p.m. in London. Automakers, real estate and technology sectors were among the biggest decliners, while energy outperformed. The FTSE 100 trimmed its drop to trade 0.4% lower, as the pound weakened after the BOE decision, where policy makers strongly pushed back against market expectations for the scale of future increases. Investors are concerned about the impact of central bank tightening on economic growth, and US stocks slumped last night after Federal Reserve Chair Jerome Powell left little doubt that he’s prepared to push rates as high as needed to stamp out inflation. Soaring prices and the energy crisis are among other headwinds posing a risk to Europe’s recovery. Traders have also been parsing earnings statements throughout this season to monitor how companies have navigated this macroecnomic backdrop.
  • Stocks and bonds fell as Jerome Powell’s warning that the Federal Reserve would raise interest rates more than previously anticipated sapped risk appetite. The pound held declines after the Bank of England raised its key rate to 3%. Futures on the S&P 500 fell 0.7% in the wake of Wednesday’s 2.5% drop. The selloff spread to Europe and Asia, where China’s affirmation of its Covid-Zero stance dashed hopes of a reopening. Lumen Technologies Inc., Peloton Interactive Inc., Moderna Inc. and Qualcomm Inc. tumbled in premarket trading, while Etsy Inc. and EBay Inc. rose.
  • Asian stocks snapped a three-day advance, with Chinese shares among the worst performers, as the Federal Reserve’s tightening signals and Beijing’s Covid Zero adherence sapped risk sentiment.  The MSCI Asia Pacific ex-Japan Index fell as much as 2.1%, led by consumer discretionary and tech shares. Nearly all markets in the region were down, with Australia slumping almost 2% and tech-heavy market Taiwan dropping nearly 1%. Japan was closed for a holiday. Fed Chair Jerome Powell’s comments that tightening still has “some ways to go” were perceived to be more aggressive and hawkish than before, triggering a reversal in US shares that spilled over into Asia. The Fed raised interest rates by 75 basis points for the fourth time in a row.
  • Oil fell after Federal Reserve Chair Jerome Powell said interest rates will go higher than earlier projected, overshadowing tightening supply. West Texas Intermediate futures dropped below $89 a barrel after rising 4% over the previous two sessions. Powell said it’s “very premature to be thinking about pausing” after the Fed hiked rates again by 75 basis points. The dollar jumped, making commodities priced in the currency less attractive. Major central banks are seeking to tame rampant inflation, which is weighing on energy demand. Bearish sentiment stemming from the rate hikes has offset a tightening fuel market, with US gasoline stockpiles falling to the smallest since 2014 and distillate supplies on the East Coast around record seasonal lows.
  • Gold fell as the dollar gained after Federal Reserve Chair Jerome Powell signaled monetary policy would need to be tightened more than previously anticipated to stamp out inflation. The Fed raised interest rates by another 75 basis points at its November meeting, though noted it could be appropriate to slow the pace of increases as soon as the next one. Bullion slid following the statements, and extended its drop Thursday as traders pared back bets on a more rapid halt to tightening. Gold is now trading near its lowest level in two weeks, pressured by a hawkish Fed which has sent prices tumbling more than 20% since its year-high in March. Higher interest rates diminish the appeal of the non-yielding metal, which tends to also have a negative correlation with the dollar.
  • Investors have wiped about $7 billion off Saudi National Bank’s market value amid growing concern over the lender’s plans to purchase a stake in Credit Suisse Group AG. The Saudi lender, which is 37% owned by the kingdom’s sovereign wealth fund, is set to become one of the Swiss bank’s biggest investors after announcing its first major international acquisition a week ago. It’s poised to own a stake of 9.9% if it participates in Credit Suisse’s rights offering, after agreeing to buy shares for about 1.17 billion Swiss francs ($1.16 billion). Credit Suisse plans to raise 4 billion francs through a rights offering and selling shares to investors including SNB. The overhaul is an urgent attempt to restore credibility at the bank after a succession of big losses and management chaos shattered its status as one of Europe’s most prestigious lenders.
  • KKR & Co. is seen as the party to beat as it competes with Cellnex Telecom SA in the final race for a stake in Vodafone Group Plc’s towers unit, people with knowledge of the matter said. The private equity firm, which has teamed up with Global Infrastructure Partners, is in pole position as Vodafone evaluates the binding offers it received last week for a stake in Frankfurt-listed Vantage Towers AG, the people said.  Cellnex is bidding together with Singapore sovereign wealth fund GIC Pte, the people said, asking not to be identified because the information is private. Cellnex is seeking to buy a majority stake that would give it operational control, one of the people said.
  • In just over five years, a Blackstone Inc. real estate fund for small investors has turned into a $70 billion force in the US economy. It has swallowed up apartments, suburban homes, dorms, data centers, hotels and shopping centers. It owns Las Vegas’s lavish Bellagio hotel and casino; a 76-story New York skyscraper designed by Frank Gehry; and a sprawling Florida complex for interns working at the Walt Disney World Resort. Unlike with many real estate investment trusts, its shares don’t trade on exchanges. But fueled by billions of dollars from affluent individuals, Blackstone Real Estate Income Trust has become one of the firm’s top profit drivers, expanding property investing in private markets to the masses.
  • Qualcomm Inc., the biggest maker of smartphone processors, tumbled in pre-market trading after giving a far weaker forecast than expected, punished by the economic slowdown and Covid-19 lockdowns in China. Revenue will be $9.2 billion to $10 billion in the fiscal first quarter, Qualcomm said Wednesday. That compares with an average analyst estimate of $12 billion. Excluding certain items, earnings will be $2.45 a share at best, Qualcomm said. The average projection was $3.40. Qualcomm is coping with the slowdown in part by freezing hiring, executives said during a conference call. The buildup of extra inventory may take two quarters to clear, the company said.
  • Moderna Inc. earnings offered a preview into the future of Covid-19 vaccine sales, and so far it doesn’t look pretty. The company cut its vaccine sales forecast for the year and gave its first hint at 2023 with interest in the shots fading as the pandemic drags on. While analysts were largely anticipating a disappointing quarter, the miss comes only days after rival Pfizer Inc. raised its vaccine guidance for the year. Moderna now has purchase agreements for a total of $18 billion to $19 billion of Covid-19 vaccine for 2022, down from the previous guidance of $21 billion, because some deliveries were delayed to next year by “short-term supply constraints,” according to a statement Thursday. The vaccine maker said it’s signed advanced purchase agreements of $4.5 billion to $5.5 billion for next year, including up to $3 billion of deferred deliveries from this year.
  • Peloton Interactive Inc. delivered a weaker forecast for the current quarter than Wall Street was predicting, even as management declared that it was beating its own timeline for turning around the fitness company. The shares dropped about 19% in early trading. Sales will be $700 million to $725 million in the fiscal second quarter, which runs through December, Peloton said in a statement Thursday. That’s down about 37% from a year earlier and well below the $869 million average analyst estimate. The outlook suggests Peloton is still struggling to recover from a post-pandemic hangover. The company had seen sales surge during Covid-19 lockdowns, only to suffer a glut of inventory after consumers went back to offices and gyms. Chief Executive Officer Barry McCarthy took the helm in February and launched a comeback plan but has yet to win over investors.
  • Morgan Stanley expects to start a fresh round of global job cuts in the coming weeks, Reuters said, without specifying the scale of the reductions. In Asia, the bank has drafted a list of staff members considered redundant, who are mainly in teams that focus on China-related businesses, Reuters said, citing two unnamed people. Some cuts will come from capital markets teams in Hong Kong and mainland China, Reuters added, noting global cuts will be made around the same time. Another unnamed person told Reuters the bank has yet to make any decisions about the scale or timings of any layoffs, saying cuts weren’t imminent and any reductions would represent a low-single digit percentage of global staff.
  • European natural gas advanced again with traders focusing on weather forecasts, while outages at key facilities highlight the risk of potential winter shortages.  Benchmark futures jumped as much as 10% as some outlooks point to cooler-than-normal conditions in northwest Europe by the start of December, meaning a potential boost in heating demand following a hot October. While recent mild temperatures and fuller-than-normal stockpiles have given Europe a much-needed reprieve from the energy crisis, a cold snap or supply disruptions would quickly see the continent dip into its reserves, threatening fuel rationing.
  • The Bank of England raised interest rates by the most in 33 years but strongly pushed back against market expectations for the scale of future increases, warning that following that path would induce a two-year recession. The Monetary Policy Committee voted 7-2 to lift rates by 75 basis points to 3%, the highest level in 14 years. But in an usually blunt comment on investors’ outlook for future hikes, it stressed the peak in rates will be “lower than priced into financial markets.” Staying on the market path used in the forecasts, which peaks at around 5.25% next year, would knock 3% off GDP and ultimately push inflation to zero, the BOE said. An outlook based on rates staying at their current 3% level implies a shorter, shallower recession and sees inflation fall close to target in two years’ time.
  • Australia’s sales of liquefied natural gas are soaring, reinforcing the nation’s trade ledger as a rare beneficiary of the energy fallout from Russia’s war on Ukraine. Export earnings from other mineral fuels — a category that includes LNG — surged 19.5% in September from the previous month to a record A$10.9 billion ($6.9 billion). Australia’s overall monthly trade surplus swelled to a wider-than-forecast A$12.4 billion in September from A$8.7 billion a month earlier as exports climbed 7%. That dovetails with warnings from Australia’s new Treasurer Jim Chalmers, who argues the economy can’t keep relying on high commodity prices to plug its fiscal shortfalls. He plowed a A$100 billion revenue windfall from export prices back into the budget handed down last month to underline his point.
  • US authorities are investigating whether executives have been gaming prearranged stock-sale programs designed to thwart the possibility of insider trading. The Justice Department and Securities and Exchange Commission are using computer algorithms in a sweeping examination of preplanned equity sales by C-suite officials, according to people familiar with the matter. Investigators are concerned that some people are manipulating the stock-sale programs, which are intended to shield executives from misconduct allegations by letting them schedule transactions in advance and on preset dates. Critics say the plans have many possible loopholes. There’s no cooling-off period, so executives may adopt one and then use it to trade just days later. Insiders can nix scheduled trades that would cause them to miss out on a stock-price bump tied to good corporate news. What’s more, executives can also have multiple, overlapping plans, increasing opportunities for such abuses.
  • Wall Street money managers looking to pile back into Treasuries after months of losses will have to contend with a Federal Reserve that stands ready to raise the stakes every step of the way. An ever-hawkish Jerome Powell made that crystal clear Wednesday — with a fresh warning that rates may yet peak at a higher-than-expected level thanks to raging inflation. After briefly rallying on hopes that the world’s most powerful central bank will soon pivot to a slower pace of policy tightening, bonds duly resumed their familiar selloff mode across the curve and traders ramped up terminal-rate expectations once more.
  • Applications for US unemployment insurance last week fell slightly, hovering around historically low levels as the labor market holds strong despite a weakening economy. Initial unemployment claims decreased by 1,000 to 217,000 in the week ended Oct. 29, Labor Department data showed Thursday. The median estimate in a Bloomberg survey of economists called for 220,000 new applications. The still-low level of jobless claims reinforces what Federal Reserve Chair Jerome Powell described as an “overheated” jobs market in which demand for workers far exceeds supply. The central bank is trying to soften labor conditions in order to cool inflation, but Powell said Wednesday that hasn’t happened yet in an “obvious” way.
  • Moderna Inc. earnings offered a preview into the future of Covid-19 vaccine sales, and so far it doesn’t look pretty.  The company cut its vaccine sales forecast for the year and gave its first hint at 2023 with interest in the shots fading as the pandemic drags on. While analysts were largely anticipating a disappointing quarter, the miss comes only days after rival Pfizer Inc. raised its vaccine guidance for the year. Moderna now has purchase agreements for a total of $18 billion to $19 billion of Covid-19 vaccine for 2022, down from the previous guidance of $21 billion, because some deliveries were delayed to next year by “short-term supply constraints,” according to a statement Thursday. The vaccine maker said it’s signed advanced purchase agreements of $4.5 billion to $5.5 billion for next year, including up to $3 billion of deferred deliveries from this year.
  • Elon Musk plans to eliminate about 3,700 jobs at Twitter Inc., or half of the social media company’s workforce, in a bid to drive down costs following his $44 billion acquisition, according to people with knowledge of the matter. Twitter’s new owner aims to inform affected staffers Friday, said the people, who requested anonymity discussing non-public plans. Musk also intends to reverse the company’s existing work-from-anywhere policy, asking remaining employees to report to offices — though some exceptions could be made, the people said. Musk and a team of advisers have been weighing a range of scenarios for job cuts and other policy changes at San Francisco-based Twitter, the people said, adding that the terms of the headcount reduction could still change. In one scenario being considered, laid off workers will be offered 60 days’ worth of severance pay, two of the people said.

*All sources from Bloomberg unless otherwise specified