The Daily – November 9, 2022

November 9, 2022

 

Daily Market Commentary

Canadian Headlines

• Rogers Communications Inc. reported earnings that were below analysts’ estimates, as a network failure cost the company hundreds of millions in revenue from wireless and internet service. The Canadian cable and wireless firm earned 84 Canadian cents a share on an adjusted basis in the third quarter, short of the consensus estimate of 87 cents. Revenue was up 2% to C$3.74 billion ($2.8 billion). It would have increased 6% without the cost of the network problem in July, which knocked consumers offline and disrupted businesses. Rogers gave credits to customers worth five days of service. Toronto-based Rogers is in the middle of a protracted takeover bid for Shaw Communications Inc. for about C$20 billion. The deal has been held up by objections from Canada’s Competition Bureau, which is trying to block it. The transaction is now in front of the Competition Tribunal, which began hearings this week. Final arguments are scheduled for mid-December, with a ruling soon after that.

World Headlines

• European stocks fell for the first time in four days as investors turned cautious ahead of key US inflation data later this week that could provide further clues on the course of monetary policy tightening. The Stoxx 600 Index was down 0.6% as of 9:44 a.m. in London, with real estate, travel and leisure and technology sectors leading the declines. No sector was in the green. Europe’s benchmark index has rebounded in the fourth quarter after slumping into a bear market in September, partly as a better-than-feared reporting season reinforced bets that most company earnings were able to withstand higher inflation and slowing growth. All eyes are now on tomorrow’s US consumer price index report for October, with economists expecting the data to show a small slowdown from the previous month.
• US equity-index futures fluctuated between gains and losses as corporate performance showed signs of stress and midterm elections failed to yield a Republican sweep that investors had anticipated. December contracts on the Nasdaq 100 and S&P 500 indexes were little changed, a day after US stocks capped a three-day rally. News Corp. and Walt Disney Co. tumbled at least 8% each in premarket New York trading after posting disappointing results. A selloff in cryptocurrencies deepened, sending Bitcoin toward the biggest four-day slump since June. Equity and bond investors had hoped for a Republican comeback in Congress, with the best outcome seen as GOP control of both the House of Representatives and Senate. But US voters delivered a mixed verdict, with Republicans heading for control of the House by smaller margins than forecast and the race for Senate still wide open. That left Thursday’s inflation report the next catalyst for markets.
• Asian shares were little changed Wednesday, after three straight gains of more than 1%, as a rally in tech stocks offset losses in Chinese shares and investor worries about US midterm election results. The MSCI Asia Pacific Index was up 0.01% as of 6:04 p.m. in Singapore, with chipmakers TSMC and Samsung Electronics among the biggest boosters, while Chinese internet names fell amid concerns over Singles Day sales.  Meanwhile, tech shares extended a rebound on cheaper valuations, boosting benchmarks in Taiwan and South Korea. Key gauges in China and Hong Kong, however, dropped for a second straight day after a recent rebound. The decliners were influenced as Chinese producer prices fell into deflation for the first time in nearly two years amid lockdowns and new Covid cases in Beijing jumped.
• Oil held losses on a challenged Chinese demand outlook and after an industry report pointed to rising US inventories. West Texas Intermediate dipped toward $88 a barrel. Swelling virus outbreaks in China show the strain its Covid Zero strategy is facing, with cases in Beijing hitting the highest in more than five months despite the nation’s program of lockdowns and mass testing. Wider markets fluctuated as the US midterm elections offered up a mixed result. In the US, the industry-funded American Petroleum Institute reported oil inventories increased by 5.61 million barrels last week, according to people familiar with the figures, which also showed higher gasoline stockpiles. Official data from the Energy Information Administration follow later Wednesday.
• Gold steadied after jumping the most in a month as investors look to this week’s US inflation readings for hints on the precious metal’s direction. Bullion, which had traded below the $1,700-an-ounce mark since the first week of October, rose past that on Tuesday on the back of a weaker dollar and falling Treasury yields. The metal tends to have a negative correlation with the greenback and bond yields as it’s priced in the US currency and doesn’t bear interest. The Federal Reserve’s aggressive tightening to cool inflation has weighed on gold, driving it down about 17% from a March peak. The US consumer price index Thursday will be keenly watched as traders try to gauge the size of the central bank’s next move.
• US mortgage rates resumed an upward trend last week toward a two-decade high, pointing to further weakness in housing demand. The contract rate on a 30-year fixed mortgage increased to 7.14% in the week ended Nov. 4, near the highest since 2001, according to Mortgage Bankers Association data released Wednesday. The group’s index of applications to buy a home edged up 1.3%. The overall measure of applications, which includes refinancing, slipped and is the weakest since 1997. An index of refinancing activity fell to a 22-year low. The housing market — one of the most sensitive areas of the economy to changes in interest rates — has deteriorated rapidly this year as the Federal Reserve tightens monetary policy to help reduce inflation.
• Fresh off his re-election victory, Florida Governor Ron DeSantis now faces a potential showdown with Donald Trump for the Republican presidential nomination in 2024. Trump has already made DeSantis his leading foil on the campaign trial – boasting at rallies of polls that show the former president leading DeSantis roughly 2-to-1 among Republicans. Those who know DeSantis say they believe he’ll seize the moment and won’t be deterred from taking on Trump. “He’ll never have a better opportunity to win the White House, and I don’t think he’s afraid of the president,” said Fred Piccolo, a Republican political consultant who served as DeSantis’s communications director in 2021. “It’s not in his nature.”
• Cryptocurrencies extended declines as Binance’s potential takeover of embattled rival exchange FTX highlighted how strains in the digital-asset industry are now buffeting some of its top players. Bitcoin, the largest token by market value, fell as much as 5.4% on Wednesday after a near-10% decline a day earlier and was trading at about $17,700 as of 9:50 a.m. in London. Just about every digital coin was struggling: Ether, Solana, Polkadot, Avalanche, and meme token Dogecoin all dropped. Binance Chief Executive Officer Changpeng “CZ” Zhao stunned the crypto world on Tuesday with an announcement that his firm was moving to take over rival FTX.com, which suffered a liquidity crunch after Zhao announced that he was selling a $530 million holding of FTX’s native token.
• Elon Musk’s $3.95 billion sale of Tesla Inc. stock prolongs a rough period for investors in the electric carmaker, whose market value has dropped by more than 50% in the past year after becoming tied to the twists and turns of Musk’s Twitter Inc. buyout. While the Tesla chief has repeatedly said he’s done selling the shares, the latest sale brings total proceeds to about $36 billion. Musk began unwinding his holding a year ago, when his Twitter followers backed him trimming his stake in response to a poll. He still owns about 14%, according to Bloomberg data. “Musk selling stock again after saying he wouldn’t can only leave the door open to more going forward one would think,” said Mark Taylor, a sales trader at Mirabaud Securities.
• Global funds are likely to return to Chinese assets in 2023 after a withdrawal this year, according to Morgan Stanley which also cut its forecast for inflows through 2030. Inflows may be capped by a structurally higher risk premia next year following outflows of more than $100 billion in 2022, strategists and economists including Robin Xing and James K Lord wrote in a note. The firm now expects China to attract $120 billion to $200 billion of foreign portfolio inflows annually from 2023 to 2030, versus an earlier forecast of $200 billion to $300 billion. “Both cyclical and structural headwinds have been driving outflow pressures, which could be alleviated by dissipation of the former — for instance, an exit from Covid Zero,” the report said. “However, rising investor concerns over China’s long-term outlook — in light of geopolitical developments and the regulatory reset — could remain an overhang for some time.
• Meta Platforms Inc. Chief Executive Officer Mark Zuckerberg said the company will cut more than 11,000 jobs in the first major round of layoffs in the social media giant’s history. The reductions, equal to about 13% of the workforce, were disclosed Wednesday in a statement. The company will also extend its hiring freeze through the first quarter. Meta, whose stock has plunged 71% this year, is taking steps to pare costs following several quarters of disappointing earnings and a slide in revenue. The retrenchment, the company’s most drastic since the founding of Facebook in 2004, reflects a sharp slowdown in the digital advertising market, an economy wobbling on the brink of recession and Zuckerberg’s multibillion-dollar investment in a speculative virtual-reality push called the metaverse.
• GoerTek Inc. plunged its daily limit of 10% after the maker of Apple Inc.’s AirPods disclosed it suspended production of an audio product from “a major overseas customer.” The Chinese company, which named neither the client nor its product, warned that decision could hit as much as 3.3 billion yuan ($456 million) of revenue in 2022. GoerTek, which also supplies Samsung Electronics Co. and Xiaomi Corp., said its relationship with other customers remain normal. GoerTek’s revelation ignited speculation that Apple, which is grappling with both flagging electronics demand and production disruptions, may be retooling a vast supply chain centered on China. Speculation in the market has centered on whether GoerTek might have failed to meet Apple’s typically stringent specifications.
• KKR & Co. and Global Infrastructure Partners are nearing a deal for Vodafone Plc’s listed towers arm, providing a rare bright spot for dealmakers in an otherwise slow market, people familiar with the matter said. The investment firms could announce a deal for a stake in Frankfurt-listed Vantage Towers AG as soon as Wednesday, the people said, asking not to be identified discussing confidential information. The consortium also includes Saudi Arabia’s Public Investment Fund as a minority investor, according to the people. The sovereign wealth fund, which is keen to invest in telecom infrastructure, will help fund a deal, they said.
• US inflation probably moderated just slightly in October data due Thursday, and yet another above-forecast reading may dash expectations for the Federal Reserve to downshift from steep interest-rate hikes. Economists project the consumer price index and the core measure that excludes food and energy both cooled on an annual basis, but to rates still consistent with persistent and elevated inflation. The overall CPI is seen rising from a month earlier by the most since June. That’s keeping a fifth-straight 75 basis-point increase in interest rates on the table for the Fed’s meeting next month, though traders are leaning more toward a half point. Also, rising prices have pushed the Fed to eye a higher peak rate next year than officials were projecting a couple months ago.
• Fallen diamond billionaire Nirav Modi lost a bid to block his extradition to India from the UK, where he is wanted in multiple criminal cases for masterminding one of country’s biggest bank frauds. A London court rejected his request to block the celebrity jeweler’s removal over concerns he poses a suicide risk if he ends up in Indian jail. “We are far from satisfied that Mr. Modi’s mental condition and the risk of suicide are such that it would be either unjust or oppressive to extradite him,” a two-judge panel said Tuesday. Although Modi has the option to appeal, the decision brings India a step closer to get an infamous fugitive to face criminal charges in a high profile fraud that contributed to an $8 billion hole Asia’s third largest economy’s banking system.
• Germany blocked the sale of Elmos Semiconductor SE’s wafer facility to a Swedish subsidiary of China’s Sai MicroElectronics Inc. in a further sign the government in Berlin is toughening its stance on Chinese access to strategic assets. Chancellor Olaf Scholz’s ruling coalition agreed to veto the deal during its weekly cabinet meeting Wednesday following a recommendation by Economy Minister Robert Habeck, according to a person familiar with the decision, who asked not to be identified discussing confidential information. Habeck has argued that chipmakers should be treated with “special sensitivity” and the hurdles for Chinese investments in the sector should be higher. He’s due to make a statement on Elmos at around 12:25 p.m. in Berlin.
• Russian diplomats tried to dial back rising fears the Kremlin might use nuclear weapons in its war in Ukraine, clarifying that their use against conventional forces would only occur if the existence of the country was at stake.  The note circulated among International Atomic Energy Agency diplomats in Vienna was the second Kremlin attempt this month to clarify its atomic doctrine. His troops losing ground on the battlefield, President Vladimir Putin in September fueled fears of escalation with warnings that Russia would use all means available to defend the parts of Ukraine it had illegally annexed. While Russia’s nuclear strategy allows it to “hypothetically resort to nuclear weapons,” an attack would be launched only in response to first use by another country or if the “very existence of the state is in jeopardy,” according to the document. “The most immediate task is to avoid any military clash of nuclear powers.”
• Mexico’s inflation decelerated more than economists expected last month, possibly giving policymakers room to slow the pace of interest rate increases at their meeting Thursday. Consumer prices rose 8.41% in October from the same month a year earlier, down from 8.7% in September and lower than the 8.45% median estimate of economists surveyed by Bloomberg, the national statistics institute reported Wednesday. Core inflation, which excludes volatile items such as fuel, sped up to 8.42% from the same month last year, slightly below expectations. “This data point is good, and the market anticipated it, but that does not mean that there will be a change in the trend of the elements that are really important,” said Jessica Roldan, chief economist at Casa de Bolsa Finamex.
• The head of the International Energy Agency slammed last month’s decision by OPEC+ to reduce oil output, saying it’ll worsen the outlook for countries sliding toward a recession. “The recent decision of OPEC+ to cut the production by 2 million barrels a day was definitely not helpful,” IEA Executive Director Fatih Birol said Wednesday in an interview from the COP27 summit in Egypt. The move is fueling inflation, especially in developing countries, and may require a “rethink,” he said. The Organization of Petroleum Exporting Countries and its allies have argued that the supply curbs are necessary in the face of severe economic uncertainty. Trends in prices and demand shortly after the decision gave some vindication to the strategy, but oil is now once again heading toward $100 a barrel, just weeks before additional sanctions on Russian crude exports kick in.

Just weeks back, Chinese stock traders were looking at every excuse to sell. In a dramatic shift in sentiment, they are now latching onto the slightest signal of positive news. Unverified social posts about a China reopening and a whiff of progress in Sino-American audit talks sent the market into an overdrive last week. On Wednesday, Beijing’s expansion of a financing support program spurred frenzied buying of property stocks even as authorities didn’t say how much aid is meant for developers. Investors are citing reasons from dirt-cheap valuations to the sheer fatigue after a relentless rout that’s gone on for several quarters. At the heart of it all is the belief that China stocks are primed for a bull run once a trigger kicks in.

*All sources from Bloomberg unless otherwise specified