November 7, 2022

 

Daily Market Commentary

Canadian Headlines

  • Dream Industrial REIT has partnered with GIC to acquire Summit Industrial Income REIT in an all-cash transaction valued at C$5.9 billion. Dream Industrial REIT to acquire a 10% interest in Summit Industrial Income REIT, representing an approximately C$470 million total equity requirement, with intention to finance its investment using cash, available liquidity, and debt. The REIT will finance this acquisition without issuing equity. Transformative transaction for Dream Industrial REIT to consolidate one of the largest managed portfolios of industrial assets in Canada totaling approximately 43 million square feet and significant expansion of the REIT’s property management platform to earn fees on market terms and enhance the REIT’s return on investment. Upon closing of the acquisition, the REIT will manage approximately 69 million square feet in total across Canada, United States, and Europe for its private and public investors.
  • Canada’s Ritchie Bros. Auctioneers Inc. agreed to buy US auto retailer IAA Inc. in a cash and stock transaction worth about $6.2 billion. IAA stockholders will receive $10 in cash and 0.5804 of Ritchie common shares for each IAA common stock they own, the company said Monday. The deal includes Ritchie assuming $1 billion of IAA’s debt. “The transaction will diversify Ritchie Bros.’ customer base by providing the company with a significant presence in the vehicle remarketing vertical that has strong industry fundamentals with proven secular growth,” Ritchie said. The purchase price of $46.88 a share represents a premium of about 19% to IAA’s closing price on Friday, according to the statement.

World Headlines

  • European equities gained for a second day as traders assessed prospects for an eventual reopening by China, looking beyond warnings from officials about the country’s stringent Covid strategy. The Stoxx Europe 600 rose 0.6% by 9:25 a.m. in London, even after Chinese health officials vowed Saturday to “unswervingly” stick to the Covid Zero approach. Meanwhile, China’s exports and imports both unexpectedly fell for the first time in more than two years, highlighting recession risks in the world’s second largest economy. European travel and leisure stocks as well as real estate outperformed while construction and health care were laggards. European stocks are extending three weeks of gains, the longest winning streak in a year. The Stoxx 600 is still down about 14% so far in 2022 due to risks to growth from central bank tightening, an energy crisis and the fallout from the war in Ukraine. Among upcoming catalysts this week, Americans head to the polls on Tuesday for midterm elections and traders will also watch the latest US inflation reading on Thursday to assess the progress of Federal Reserve rate hikes in cooling prices.
  • U.S. equity-index futures rose and a bond selloff stalled as some investors bet a period of disinflation has already begun and the midterm election results will be favorable to markets. Contracts on the S&P 500 and Nasdaq 100 indexes added at least 0.4% each after dropping earlier. Most Treasuries erased losses, leaving only the two-year yield higher on the day. The dollar gave up its gains and oil pared losses. Facebook parent Meta Platforms Inc. advanced in New York premarket trading on plans for job cuts. Monday’s partial gains in Treasuries were underpinned by a 2-basis point drop in the 10-year yield. The two-year rate, more sensitive to monetary policy, remained higher around the 4.68% level.
  • Equities across Asia climbed as traders snapped up Chinese stocks in hopes of an eventual reopening and as US bond yields slipped. The MSCI Asia Pacific Index advanced as much as 1.8% to the highest in a month, led by materials and technology stocks. China’s tech shares extended their rally from Friday, which was spurred by reported progress in efforts to prevent the delisting of Chinese companies from US bourses. Hong Kong topped gains in the region even though Chinese officials stuck to their Covid Zero approach over the weekend, as investors said extreme pessimism had already been priced into Greater China markets.
  • Oil pared an earlier decline as a weaker dollar offset signals from China that there will be no relaxation of its Covid Zero stance after cases hit a six-month high. West Texas Intermediate edged lower to trade near $92 a barrel after gaining more than 5% last week. Officials at China’s National Health Commission’s disease prevention and control bureau said the country will “unswervingly” adhere to current virus controls. Oil has been buffeted in recent weeks as investors sought to gauge the outlook for demand in China, the impact of looming sanctions on Russian flows amid the war in Ukraine, and a decision by the Organization of Petroleum Exporting Countries and its allies to rein in production from this month. Gathering concerns about a global slowdown and tighter monetary policy have also swung prices. Nevertheless, a recent rally has once again brought the global Brent benchmark back toward $100 a barrel.
  • Gold edged lower, after posting its biggest jump since March 2020 as mixed US jobs data left traders pondering the Federal Reserve’s tightening cycle. The metal still held most of Friday’s 3.2% gain following a US employment report that painted an unclear picture of the labor market. US businesses reported strong hiring and wage increases in October, though the unemployment rate climbed. The print gave no conclusive answer on how Fed interest-rate hikes are affecting a strong job market that’s fueling inflation, though gold surged on the back of a plunge in the dollar. Bullion has slid almost 20% from a peak in March due to rapid monetary tightening, which curbs the appeal of non-yielding assets.
  • US natural gas futures soared as much as 10% Monday as a winter storm hits the Pacific Northwest and frigid weather is expected across most of the country next week. In the first major cold snap of the season, air filtering in across the West is pushing temperatures 15 to 25 degrees Fahrenheit under normal levels and will likely deposit 2 to 4 feet of snow through Tuesday in the Sierra Nevada mountains, according to the National Weather Service. Temperatures are expected to be below usual across nearly the entire lower-48 states from Nov. 12 to 16, according to the National Oceanic and Atmospheric Administration. The cold weather will drive increased heating demand at a time when gas inventories remain below the five-year seasonal average. Rising prices for the fuel will put more pressure on electricity costs, which have become a political issue in some areas ahead of Tuesday’s mid-term elections as more Americans fall behind on their power bills.
  • Investors added money to exchange-traded funds that buy emerging market stocks and bonds last week. This was the fifth straight week of inflows. Inflows to U.S.-listed emerging market ETFs that invest across developing nations as well as those that target specific countries totaled $393,195 in the week ended Nov. 4, compared with gains of $1.14 billion in the previous week, according to data compiled by Bloomberg. So far this year, inflows have totalled $20.4 billion.
  • Apple Inc. expects to produce at least 3 million fewer iPhone 14 handsets than originally anticipated this year, according to people familiar with its plans. The company and its suppliers now aim to make 87 million devices or fewer, compared with a target of 90 million units earlier, the people said, asking not to be named discussing private information. The reduction is primarily due to softer demand for the iPhone 14 and 14 Plus models, cheaper alternatives to the high-end Pro offerings. That comes in addition to supply problems in places like Zhengzhou, which is home to the main iPhone assembly site and is under a weeklong Covid-19 lockdown. Apple’s shares slid more than 2% in pre-market trading in New York.
  • Philip Morris International Inc. is proceeding with the $16 billion takeover of nicotine pouch maker Swedish Match AB after securing support from enough of its top shareholders, including Elliott Investment Management LP. The deal had been in doubt as it was unclear if Elliott, the largest shareholder with more than 10% of the shares, would back the deal, which initially was contingent on getting 90% support. However, Philip Morris said Monday it has the backing of 83% of shareholders and waived the acceptance level to give remaining investors time to agree to the offer. They have until Nov 25 to tender their shares.
  • An unprecedented selloff in Asian perpetual dollar bonds, sparked by a South Korean insurer’s decision to buck convention by skipping a call option, is putting a focus on some $4.3 billion of such securities. That’s the amount of dollar debt with optional redemption dates before the end of this year owed financial companies in the region, according to Bloomberg-compiled data. The first deadline is on Monday, when China Huarong Asset Management Co. is due to redeem a $700m perpetual dollar note; it has said in September it would redeem the note at par on that day. The list of companies across Asia-Pacific save for Japan also includes FWD Group Holdings Ltd., the insurer backed by billionaire Richard Li, and Commonwealth Bank of Australia.
  • Investors should stay bullish on equities ahead of this week’s US midterm elections, according to Morgan Stanley’s Michael Wilson, the top-ranked strategist who correctly predicted this year’s slump in stocks. Polls pointing to Republicans winning at least one chamber of Congress provide a potential catalyst for lower bond yields and higher equity prices, which would be enough to keep the bear-market rally going, Wilson wrote in a note Monday. Americans head to the polls on Tuesday to decide control of both chambers of Congress, the governorship in 36 states, and countless other local races and ballot initiatives. A “clean sweep” by the Republicans could greatly increase the chance of fiscal spending being frozen and historically high budget deficits being reduced, fueling a rally in 10-year Treasuries that can keep the equity market rising, Wilson said.
  • Meta Platforms Inc. is planning to begin layoffs that will affect thousands of workers from this week, Wall Street Journal reported, citing people with knowledge of the matter. The job cuts could come as early as Wednesday, the newspaper said. The company has already told employees to cancel non-essential travel from this week, according to the report. Meta shares rose as much as 3.5% during premarket trading in New York on Monday. The stock has declined about 73% for the year through Friday, when it closed at $90.79 a share. Chief Executive Officer Mark Zuckerberg in September outlined plans to reorganize teams and reduce headcount for the first time, following a sharp slowdown in growth at the parent of Facebook and Instagram. Zuckerberg said then that Meta will likely be smaller in 2023 than it was this year.
  • UK Trade Minister Greg Hands is holding talks with Taiwanese officials to “future-proof” Britain’s economy in the coming decades, as Rishi Sunak’s administration looks to take a harder stance on China. The in-person trip to Taipei, aimed at boosting economic ties between the countries, comes as the UK takes an increasingly protectionist approach to Chinese investment. Prime Minister Sunak has described China as the “biggest long-term threat to Britain,” and during his summer leadership race against Liz Truss said China is “attempting to bully their neighbors, including Taiwan.” The talks will focus on industries like financial technology, renewable energy and pharmaceuticals, according to a statement Monday. The UK noted that Taiwan is a leading manufacturer of semiconductors — a key component in electric devices — and crucial because Britain is close to making a decision on a probe into a Chinese-led takeover of Newport Wafer Fab, which owns the country’s largest semiconductor plant.
  • Japan’s second extra budget will only increase bond issuance by around 5 trillion yen ($34.1 billion) this fiscal year, according to people familiar with the matter. The increase in so-called calendar base government bond market issuance will push the overall figure for the year ending in March from a previously planned 198.6 trillion yen to more than 200 trillion yen for a third-straight year. Last month, Prime Minister Fumio Kishida announced a 29.1 trillion yen extra budget to fund his latest economic stimulus package, aiming to ease the impact from inflation and boost growth. Most of the package will be financed by 22.9 trillion yen of JGBs, but the ministry has limited the amount of fresh issuance by cutting back on unused fiscal investment and loan program bonds and refinancing bonds by around 10 trillion yen. It will also draw on about 5 trillion yen of front-loaded bonds to curb the overall increase for this year.
  • A unit of Walgreens Boots Alliance Inc. is nearing a deal to combine with a big owner of medical practices and urgent-care centers in a transaction worth roughly $9 billion including debt, according to people familiar with the matter, the latest in a string of acquisitions by big consumer-focused companies aiming to delve deeper into medical care. The drugstore giant’s primary-care-center subsidiary, Village Practice Management, would combine with Summit Health, the parent company of CityMD urgent-care centers, in an agreement that could be reached as early as Monday, the people said. Summit Health, which is backed by private-equity firm Warburg Pincus LLC, has more than 370 locations in New York, New Jersey, Connecticut, Pennsylvania and Central Oregon, according to the company’s website. Current and former physicians also own a large interest in the business.
  • The private market is coming to collect — and it threatens to wreak havoc across global stocks and bonds. As financial conditions tighten around the world, private-market funds are demanding that investors stump up more of the cash they pledged during the easy-money days of the pandemic. While many big pensions and endowments are expected to have sufficient cash flows to meet these capital calls, the fear is that a large number of other investors will have to offload liquid assets to meet the obligations. That would likely mean even deeper losses in public markets for equities and debt, where returns are already down more than 20% this year. Early signs of trouble are evident in the shrinking distributions that these private-market partnerships are delivering to investors, according to data from the Burgiss Group LLC.
  • Twitter Inc. is heading into its second full workweek under Elon Musk with half its workforce, mounting losses and a couple of unexpected reversals to its plans. The social-media company laid off close to 3,700 people on Friday, only to reach out soon thereafter to dozens of employees who it decided were either fired in error or too essential to the changes the billionaire businessman wants to make. Another of Musk’s key early goals — adding verification check marks for members of its monthly subscription service — is being delayed until Wednesday to avoid potential chaos during the US midterm elections. The whiplash events, as described by people familiar with the situation or in an internal company memo posted on Slack, follow Musk’s own acknowledgment in a tweet that the company he and well-heeled partners bought for $44 billion is losing $4 million a day.
  • A consortium led by Japan Industrial Partners Inc. has submitted a 2.2 trillion yen ($15 billion) offer for Toshiba Corp., Nikkei reported, without saying where it got the information. The JIP-led group, the preferred bidder for the troubled Japanese conglomerate, will get around 1 trillion yen of the funds from Japanese companies, more than 10 of which have expressed an interest in participating in the buyout, the newspaper said. JIP itself will invest 100 billion yen, it said. The bid is just shy of Toshiba’s current market value. The company had a market capitalization of $15.1 billion as of Monday’s close of stock trading in Tokyo.
  • Goldman Sachs Group Inc. is throwing its weight behind a form of funding intended to help bridge the climate-finance gap between rich and poor countries. The Climate Innovation and Development Fund, which is backed by Goldman Sachs and Bloomberg Philanthropies, completed its first set of blended-finance investments which focused on the transport sectors of India and Vietnam, according to a statement on Monday. The announcement comes as world leaders gather in Egypt for UN-backed climate talks that will focus on how rich countries can help pay for the damages caused by global warming elsewhere. The Glasgow Financial Alliance for Net Zero, of which Goldman is a member, has said that achieving net-zero emissions “requires a truly global, whole-economy transition,” as decarbonizing developing economies is critical to achieving global climate goals.

*All sources from Bloomberg unless otherwise specified