November 30, 2022

Daily Market Commentary

Canadian Headlines

  • Royal Bank of Canada, which just struck its largest deal ever to expand in its home market, is getting a boost from its dominant position in the country’s retail banking landscape at a time when rising rates are making lending more profitable. Net interest income rose 24% to C$6.28 billion ($4.64 billion) in the fiscal fourth quarter, the Toronto-based company said Wednesday. Overall profit topped analysts’ estimates in the three months through October. Royal Bank, Canada’s largest lender, increased loans to consumers and businesses in the country last quarter as the economy continued to grow despite the rising odds of a recession. At the same time, its net interest margin expanded 4 basis points from the previous three months to 1.56%, helped by a large base of low-cost deposits. “Even with a smaller proportion of total revenue from net interest income than peers, Royal Bank has positioned itself well through its high-quality deposit franchises both in Canada and the US,” Paul Holden, an analyst at Canadian Imperial Bank of Commerce, said in a note to clients before results were announced.
  • Canadian Prime Minister Justin Trudeau’s government is trying to land supply-chain deals with major German automakers in the face of fierce competition from the US on electric-vehicle production. Industry Minister Francois-Philippe Champagne has embarked on a week-long trip to Belgium and Germany, where he’ll attend the management conference of Volkswagen AG and the board meeting of Mercedes-Benz Group AG, among other gatherings. In August, the government signed memorandums of understanding with both firms during German Chancellor Olaf Scholz’s visit to Canada. This week’s trip is about “bringing that to the next level,” Champagne said in an interview.
  • National Bank of Canada’s capital-markets division finally succumbed to a broader slowdown, hurting the lender’s results in the fiscal fourth quarter. Profit in the financial-markets division slumped 14% to C$205 million ($152 million) in the three months through October, the Montreal-based bank said Wednesday. Analysts had projected C$252.3 million. Overall profit also missed analysts’ estimates. National Bank’s financial-markets business has posted stronger results than peers in recent quarters, defying a broader slowdown in Canada’s capital markets, helped by a heavier focus on trading. That trend ended last quarter, with revenue from trading activity sliding 24%. National Bank shares have risen 2.1% this year, compared with a 7.6% drop for the S&P/TSX Commercial Banks Index.

World Headlines

  • European stocks gained as euro-zone inflation slowed, while investors weighed signals of China’s softer stance on Covid and prepared for Jerome Powell’s speech on the economy. The Stoxx Europe 600 Index added 0.6% by 10:14 a.m. Automakers and consumer products outperformed, while telecoms and real estate lagged. Euro-zone inflation slowed for the first time in 1 1/2 years, offering a glimmer of hope to the European Central Bank in its struggle to quell the worst consumer-price shock in a generation. European stocks have rallied about 15% since September lows, with the Euro Stoxx 50 and the Dax indexes entering bull markets in recent weeks, as optimism over China’s reopening added to bets that inflation may have peaked. The benchmark Stoxx 600 Index is on course for a second monthly gain for the first time since August 2021, although some strategists are cautious about their outlook due to risks around recession and earnings contraction. Investors will also monitor the speech by the Fed Chair Powell on the economy and the labor market today.
  • US equity futures edged higher and the dollar slipped for a second day, as investors awaited a speech by Federal Reserve Chair Jerome Powell for signals about the path of interest-rate increases and assessed prospects for China’s economic reopening. Investors will keep their attention trained later on Powell’s comments on the economy and the labor market. He is widely expected to signal that the next Fed rate hike will step down to 50 basis points, though he will also likely warn that policy tightening has further to run. Amid all the recent bumpiness in markets, an index of global stocks was on course for a second monthly advance, while bonds were also poised for a monthly gain. The lockstep moves in stocks and bonds has taken their correlation to highest level since 2012, heaping pressure on investors seeking to hedge risk by splitting their portfolios between the two asset classes.
  • The MSCI Asia Pacific Index jumped 15% this month, set for its biggest jump since 1998, as benchmarks in markets from Hong Kong to the Philippines saw strong gains that cracked records held for at least a decade. The MSCI All Country World Index is up less than 6%. Asia’s surge has been driven by growing signs that China is easing its Covid-Zero policy, and expectations that the Federal Reserve will move toward a slower pace of rate hikes. Some asset managers are arguing this is only the start, making the case for the outperformance to continue into 2023 after the region lagged global peers for months. Foreign funds bought $12.6 billion worth of shares on a net basis in emerging Asia excluding China this month, the biggest inflows in two years, according to data compiled by Bloomberg.
  • Oil rose for a third day as data pointed to a large decline in US oil stockpiles, while traders weighed the outlook for Chinese demand and a forthcoming OPEC+ meeting. West Texas Intermediate climbed above $80 a barrel for the first time in a week after the industry-funded American Petroleum Institute reported inventories fell by almost 8 million barrels. At the same time, traders are watching the demand outlook in China as markets in Asia were buoyed by bets on its economy further reopening. The European Union is yet to agree on a price cap for Russian oil with sanctions on the country’s exports due to come into effect on Dec. 5. The Organization of Petroleum Exporting Countries and allies including Russia will hold an online gathering Dec. 4, scrapping an in-person meeting in Vienna. While some expect the alliance to cut supply to counter market weakness, others now believe the change of plan signals a more straightforward rolling over of production levels.
  • Gold headed for its biggest monthly gain since May 2021 after the dollar fell on signs the Federal Reserve is preparing to slow the pace of interest-rate hikes. The precious metal edged higher as the greenback weakened amid bullish sentiment in equity markets. Signs that China may begin to loosen its tough Covid-Zero policy has weighed on the US currency over the past couple of days, supporting gold. Bullion is set to finish November up more than 7%, following seven straight months of declines as the Fed aggressively tightened monetary policy. Chair Jerome Powell is expected to cement expectations for slower tightening at a speech on Wednesday.
  • Euro-zone inflation slowed for the first time in 1 1/2 years, offering a glimmer of hope to the European Central Bank in its struggle to quell the worst consumer-price shock in a generation. The reading for November was 10%, Eurostat said Wednesday, less than the 10.4% median estimate of economists surveyed by Bloomberg. The drop, from 10.6% in October, was the biggest since 2020 and was thanks to slower advances in energy and services costs, even as food prices grew more quickly. ECB officials have highlighted the data as crucial for their judgment over whether to raise interest rates by 75 basis points for a third straight time — an outcome that may now be less probable. Policy makers are likely to study the report at a scheduled meeting on Wednesday, their final gathering before the Dec. 15 decision.
  • China’s top law enforcement body pledged to crack down on “hostile forces” and their “sabotage,” comments that appeared intended as a warning to protesters angry about Covid-19 policies and to provide justification for government efforts to suppress dissent. Security czar Chen Wenqing used a meeting of the Communist Party’s Central Political and Legal Affairs Commission to urge law-enforcement agencies to take strong measures to safeguard national security and social stability, according to a statement. “Illegal and criminal acts that disrupt social order” won’t be tolerated, the commission said at the meeting, which was held on Monday and not disclosed until late Tuesday. While the statement made no reference to widespread protests against China’s Covid Zero strategy last weekend, the timing suggested it came in response to the rare outpouring of criticism. Chen — a Politburo member who was previously China’s chief spy — delivered “recent decisions and arrangements” from the top party leadership, the body said, without elaborating.
  • European natural gas prices are on track for their first monthly gain since August as colder-than-usual weather signals higher demand. While Europe benefited from a mild start to the winter heating season, cooler temperatures over the next month are set to put more pressure on stockpiles built up over the summer. Russia’s Gazprom PJSC indicated gas flows via Ukraine would continue as usual on Wednesday, despite previously threatening to halt transit because of a spat with Moldova, but traders are still wary of further cuts to already-low flows.
  • President Joe Biden will welcome French President Emmanuel Macron for the first White House state dinner in more than three years on Thursday, setting aside recent tensions with Paris over defense and trade issues to celebrate the oldest US alliance. Macron and his wife, Brigitte, arrived in Washington Tuesday evening for the state visit. Thursday’s dinner will be preceded by meetings with US lawmakers and at NASA, to discuss US and French cooperation on space exploration, as well as a joint news conference with Biden. His government is angry about a new US climate law that Europeans say unfairly subsidizes North American electric-vehicle production. And France is still stinging over a surprise US and UK deal with Australia to build nuclear submarines that kneecapped Paris’s plans to sell Canberra diesel subs.
  • Cosmetics maker Natura &Co is working with Bank of America Corp. and Morgan Stanley to sell a stake in its Aesop unit, according to people familiar to the matter. Aesop, the Brazilian company’s high-end brand, has drawn interest from private equity firm CVC Capital Partners and competitors such as L’Occitane International SA and Shiseido Co., said the people, who asked not to be identified because discussions are private. Natura had earlier preferred an initial public offering for Aesop, but is now leaning toward a minority stake sale because of the unfavorable equity markets, the people said.
  • The Senate passed legislation to enshrine federal protection for same-sex marriages with a bipartisan vote that dramatically demonstrates the massive cultural shift in the US on the issue. The 61-36 vote on Tuesday was a victory for Democrats who’ve raised concerns that the conservative-leaning Supreme Court could overturn a 2015 ruling that established the right to same-sex marriage. “It’s a scary but necessary acknowledgment that despite all the progress we made, the constitutional right to same-sex marriage is not even a decade old and exists only by the virtue of a very narrow 5-4 Supreme Court decision,” said Senate Majority Leader Chuck Schumer. “And we all know the court has changed since that decision. As we have already seen this year what the court has decided in the past can be easily taken away in the future.”
  • US lawmakers are discussing a compromise measure that would allow Boeing Co. to certify its final two 737 Max models without an expensive redesign while also adding new safety requirements. Talks involving Senate and House lawmakers ramped up dramatically after the Thanksgiving holiday, and Senator Maria Cantwell of Washington, the Democratic chairwoman of the Commerce Committee, has floated a plan that would require an additional sensor system, people familiar with the talks said. The sensors are being tested on the Max 10, one of the jets in jeopardy of missing a late December certification deadline. The proposal hasn’t been finalized and is opposed by some lawmakers and family members of passengers who died in the crashes of two 737 Max planes in 2018 and 2019, the people said. They asked not to be identified discussing the sensitive negotiations.
  • Sweden’s SBB has agreed to sell property worth almost $1 billion to pay off debt, showing how the country’s unraveling real-estate markets are hitting commercial landlords. The company is one of several that pursued an aggressive expansion in Sweden over the past years relying on billions of dollars of cheap money from bond investors hungry for yield. It’s now unwinding those bets, selling assets to reduce its leverage and defend its credit rating, which is under review by S&P Global Ratings for a downgrade to junk. Formally known as Samhallsbyggnadsbolaget i Norden AB, the company on Wednesday said it would divest a portfolio of public-education buildings to infrastructure investor Brookfield for as much as 10.4 billion kronor ($983 million). The transaction is made through subsidiary EduCo, in which Brookfield buys a 49% stake for 9.2 billion kronor in cash up front, plus up to about 1.2 billion kronor in earn-outs.
  • DoorDash Inc. is laying off about 1,250 people in an effort to rein in expenses, according to a company memo from Chief Executive Officer Tony Xu viewed by Bloomberg. “While our business continues to grow fast, given how quickly we hired, our operating expenses – if left unabated – would continue to outgrow our revenue,” Xu wrote in a letter to staff on Wednesday. The cuts will affect about 6% of the company’s workforce, a mix of US and non-US based staff, according to people familiar with the matter asking not to be identified as the matter was not yet public. By scaling back headcount, DoorDash aims to curb operating expenses, which topped $2 billion in the third quarter, largely due to stock-based compensation and the absorption of Wolt, the Finnish food-delivery company it acquired last year.
  • US mortgage rates declined last week to the lowest level in more than two months, extending a recent plunge that is providing modest relief to a weakened housing market. The contract rate on a 30-year fixed mortgage fell 18 basis points to 6.49% in the week ended Nov. 25, the lowest since mid-September, according to Mortgage Bankers Association data released Wednesday. The 30-year fixed rate has fallen 65 basis points in the last three weeks, the most over a similar period since 2008. With mounting concerns about a recession and signs that inflation is cooling, economists expect the Federal Reserve to slow the pace of interest-rate increases.
  • OPEC and its allies are increasingly expected to hold production steady after the group shifted its meeting online amid an uncertain market outlook. Earlier this week, OPEC+ delegates signaled that Saudi Arabia and its partners might consider additional output curbs at its gathering on Sunday, which at the time was scheduled to take place at the cartel’s Vienna headquarters. But with the group’s decision to hold a virtual session instead, views are changing. While deeper supply cuts may still be discussed, oil analysts and OPEC+ officials widely predict that the alliance will keep output unchanged.
  • Clients of Credit Suisse Group AG concerned over the turmoil the bank is currently experiencing are approaching Zurich rival UBS Group AG as an alternative for their investments, UBS Chairman Colm Kelleher said. “We are not actively benefiting at their expense,” Kelleher said at a conference in London on Wednesday.  “We view them as a worthy competitor, going through a crisis which I believe they will manage and get to safer ground. But we are also in a world of clients moving money around, where clients proactively approach us.” UBS has seen significant inflows into its Asian wealth management business over the past three months as rich customers flee Credit Suisse, Bloomberg reported last week. That dynamic is contributing to the massive client outflows that are exacerbating the crisis of confidence at the smaller lender, and aiding the growth of assets under management at UBS.
  • Brazil’s unemployment rate fell for the eighth consecutive month to the lowest since May 2015, as a strengthening labor market helps drive growth in Latin America’s largest economy. Official data released on Wednesday showed joblessness dropping to 8.3% in the three months through October, below all forecasts in a Bloomberg survey that had a 8.5% median estimate. The number of unemployed fell to nine million, the national statistics agency said. Brazil’s labor market has surprised many observers amid months of job creation and up-ticks in participation rates. But as President-elect Luiz Inacio Lula da Silva prepares to take power, analysts warn the economy may soon lose steam as high borrowing costs begin to bite and re-opening effects fade.

*All sources from Bloomberg unless otherwise specified