The Daily – October 10, 2023

October 10, 2023

Daily Market Commentary

NEWS

Canadian Headlines

• Workers at General Motors Co.’s Canadian plants are going on strike, idling key factories in Ontario, after contract negotiations with the union representing about 4,300 employees failed to bring an agreement. Unifor, which represents auto workers in Canada, had been trying to get GM to match a three-year deal it signed with Ford Motor Co. that includes wage increases, cost of living allowances and pension improvements. It had set a deadline of Monday at 11:59 p.m. Toronto time to get a deal. The strike raises the pressure on GM, which has already been dealing since mid-September with US strikes by the United Auto Workers. The automaker gave an important concession last week, agreeing to bring battery-plant employees into the UAW’s fold, helping to ease that union’s concerns about the transition to electric vehicles.
• Australia’s competition watchdog has conditionally approved private equity firm Brookfield’s A$18.7 billion ($12 billion) takeover of the nation’s largest energy producer, Origin Energy Ltd. The Australian Competition and Consumer Commission said Tuesday it would wave through the Canadian investment firm’s takeover, in league with EIG Global Energy Partners-backed MidOcean Energy, for the utility. The proposed deal is the third-largest in the country so far this year, according to data compiled by Bloomberg. “After a detailed review, we are satisfied that the proposed acquisition is likely to result in public benefits that would outweigh the likely public detriments,” ACCC Chair Gina Cass-Gottlieb said. “The ACCC considers that the acquisition will likely result in an accelerated roll-out of renewable energy generation, leading to a more rapid reduction in Australia’s greenhouse gas emissions.”

World Headlines

• European stocks rose as a drop in bond yields and optimism about China considering fresh stimulus helped equities recover from their downbeat start to the week as investors continue to assess geopolitical risks from the Israel-Hamas war. The Stoxx Europe 600 Index was up 1.5% by 10:20 a.m. in London. Basic resources stocks lead the gains and luxury companies including LVMH also got a boost after Bloomberg News reported that the Chinese government is mulling unleashing a new round of stimulus to boost the economy. Dovish remarks from top Federal Reserve officials added to the improved risk appetite. October had been shaping up to be a lackluster month for European equities as the Middle East conflict heightens geopolitical risks, with the benchmark gauge little-changed on the month as investors also mull the impact of high rates and a sluggish Chinese economy.
• US equity futures rose and European shares rallied after dovish comments by Federal Reserve officials and the prospect of more economic stimulus from China brought some risk appetite back to markets as investors continue to evaluate the potential impact of the Israel-Hamas conflict. Futures on the S&P 500 and Nasdaq 100 rose about 0.2% each after Monday’s solid gains on Wall Street. US-listed Chinese stocks including Alibaba Group Holdings Ltd. and JD.com Inc. were among premarket gainers after Bloomberg reported that China is preparing to unleash a new round of measures to support its economy. Among other individual movers, PepsiCo Inc. climbed almost 3% after raising its profit forecast. Rival drinks-maker The Coca-Cola Co. gained more than 1%. Mobile-chip makers Skyworks Solutions Inc. and Qorvo Inc. declined after Citigroup Inc. downgraded the stocks to sell.
• Asian stocks rose, on course for their biggest daily gain since July, as dovish comments from Federal Reserve officials lifted risk sentiment and fueled expectations that the US central bank may pause rate hikes. The MSCI Asia Pacific Index climbed as much as 1.6%, with all sub-sectors except real estate in the green. Japanese benchmarks climbed after holidays alongside gains in Hong Kong and Southeast Asia. Mainland Chinese stocks fell amid concerns about the strength of economic recovery. Taiwan’s market was closed for a holiday. The respite for risk assets came even as global investors contend with rising geopolitical tensions sparked by the latest Middle East conflict, as well as renewed inflationary pressure due to surging oil prices.
• Oil held the biggest jump in six months as markets digested the fallout from Hamas’s surprise attack on Israel over the weekend and the prospect of new stimulus in China. West Texas Intermediate was steady near $86 a barrel. At least 1,500 people have died so far as the conflict in Israel, which has the potential for far wider geopolitical ramifications, entered its fourth day. While Israel and Palestine play a minor role in the world of oil, the Middle East accounts for around a third of global supply, and the market is still worried about potential threats. Stricter enforcement of US sanctions on Iranian crude exports and any blockades or attacks on vessels in key shipping lanes are the main risks, while it also transforms the landscape of a potential US, Saudi, Israeli defense pact.
• The conflict between Israel and Hamas has turned the spotlight on billions of dollars in Israel-linked fund assets, as money managers gauge the toll on businesses operating in the war-stricken country. At least $43 billion is held in Israeli stocks or bonds by passive and actively managed funds tracked by Bloomberg. And that’s taking into account only the funds that have 70% or more of their exposure in Israeli securities. Among the products are US-listed iShares MSCI Israel ETF and ARK Israel Innovative Technology ETF, both of which slumped in Wall Street trading on Monday. Israel’s stocks tumbled with the shekel and local bonds following the sudden attack by Hamas over the weekend. Local assets, traditionally seen as a stable spot in the Middle East, had already been rocked this year after government efforts to weaken the judiciary and ensuing mass protests unsettled markets. Concerns about an escalation of the war are rife.
• Bond investors are starting to bet the worst-ever rout in US Treasuries may soon be over. US 10-year yields slid the most since March after dovish comments from Federal Reserve officials fueled speculation interest-rate hikes are about done, while jitters over the Israel-Hamas war added haven demand. The move was more pronounced than normal as trading of cash Treasuries had been shut worldwide Monday for a US holiday. Two Fed officials speaking Monday expressed the idea that the recent surge in US yields may have done some of the job of tightening financial conditions for them. The US 10-year real yield is around its highest in 15 years.
• PepsiCo Inc. raised its earnings growth forecast and reported results that beat expectations as consumers absorbed higher prices on the company’s snacks and beverages. Earnings of $2.25 per share for the third quarter were above analysts’ average estimate of $2.16. The maker of Tostitos chips and Mountain Dew sodas reported net revenue of $23.5 billion, also surpassing the consensus estimate. Pepsi shares rose 2.5% in trading before US exchanges opened. Rival Coca-Cola Co. also gained. Purchase, New York-based Pepsi increased its guidance for full-year earnings while leaving the revenue growth estimate unchanged.
• The International Monetary Fund lifted its global inflation forecast for next year and called for central banks to keep policy tight until there’s a durable easing in price pressures. The IMF boosted its projection for the pace of consumer price increases across the world to 5.8% for next year in its World Economic Outlook released Tuesday, up from 5.2% seen three months ago. The call for vigilance on inflation comes as it also trimmed the forecast for economic growth in 2024. In most countries, the IMF, an institution charged with monitoring the health of the global economy, foresees inflation remaining above central bank targets until 2025.
• The European Union said late Monday that it’s urgently reviewing the bloc’s assistance to the Palestinians after several member states protested an earlier announcement that aid would be suspended. EU foreign ministers are due to discuss the implications of the deadly attack by the militant group Hamas, including for the bloc’s aid to the Palestinians, at an emergency gathering Tuesday afternoon. The bloc’s enlargement commissioner, Oliver Varhelyi, preempted the planned debate, posting on social media platform X earlier Monday that the EU was suspending all payments in its €691 million ($730 million) development aid program. A second EU commissioner, Janez Lenarcic, said separately that humanitarian aid would continue “as long as needed.”
• Stockholm plans to ban petrol and diesel cars in part of the city starting in 2025 in a bid to crack down on pollution. An area of about 20 blocks that straddles the Swedish capital’s finance area and main shopping drags will only allow electric cars, some hybrid trucks and fuel-cell vehicles, according to rules to be presented on Wednesday, SVT reported on its website. An expansion of the zone could be decided in the first half of 2025. Stockholm could be the first major capital to introduce such a wide prohibition and goes further than plans by Paris, Athens and Madrid to ban diesel cars. Other cities, including London, have introduced low-emission zones that include daily fees for entering the city center in older combustion engines.
• China is considering raising its budget deficit for 2023 as the government prepares to unleash a new round of stimulus to help the economy meet the official growth target, according to people familiar with the matter. Policymakers are weighing the issuance of at least 1 trillion yuan ($137 billion) of additional sovereign debt for spending on infrastructure such as water conservancy projects, said the people, asking not be identified discussing a private matter. That could raise this year’s budget deficit to well above the 3% cap set in March, one of the people said. An announcement may come as early as this month, another person said, though deliberations are ongoing and the government’s plans could change. The discussions underscore mounting concerns among China’s top leadership over the trajectory of the world’s second-largest economy and how growth compares to the US. It would also mark a shift in Beijing’s stance as the government has so far avoided broader fiscal stimulus despite a deepening property crisis and rising deflationary pressure that have put the growth goal of around 5% for the year at risk.
• Slumping US financial stocks are close to testing a level that represents both their highs in 2007 before the global financial crisis, as well as their lows in 2022 and earlier this year. It’s a crucial threshold that stock-market prognosticators are monitoring to gauge whether a significant break lower will spur broader selling in the coming weeks and months. The $30 billion Financial Select Sector SPDR Fund (XLF), which holds the financial-related components of the S&P 500 Index, is trading close to the $31-$32 area. That level goes all the way back to the ETF’s highs from 16 years ago and also served as resistance in 2018 and 2019 during Washington’s trade spat with Beijing. It also represents the peak before the Covid-fueled selloff began in March 2020. Once it was eclipsed in early 2021, that approximate level served as critical support for the XLF last summer and again during the regional-bank turmoil in March of this year. Wall Street is eager to hear what lenders anticipate in coming quarters, with JPMorgan Chase & Co. kicking off the earnings season on Friday, along with Wells Fargo & Co. and Citigroup Inc. Analysts expect banks in the S&P 500 to report a 1.6% decline in combined profit in the first quarter, according to Bloomberg Intelligence. Revenue for the group is expected to grow 6.4%.
• Amazon.com Inc.’s fall sale for Prime subscribers kicked off Tuesday, with the e-commerce giant looking to get a jump on what’s expected to be a humdrum holiday shopping season. US online sales in November and December will rise 4.8% to $222 billion, according to Adobe Inc., beating last year’s 3.5% growth, but well below the pre-pandemic level of 13% reached in 2019. Consumers are grappling with stubbornly persistent inflation even as their debt obligations balloon and savings shrink. The resumption of student loan payments, which were suspended during the pandemic, also are expected to weigh on spending.
• Republicans angling to replace ousted House Speaker Kevin McCarthy will vie for their colleagues’ approval Tuesday, as pressure mounts for Republicans to unite behind a leader with war breaking out in Israel. Republicans remain deeply divided over who the next speaker should be, with no candidate emerging as the clear consensus. Without someone in the top job, the chamber’s business grinds to a halt, delaying work on pressing priorities ranging from domestic federal funding to aid for Israel’s military. The No. 2 House Republican, Steve Scalise of Louisiana, and Judiciary Chairman Jim Jordan of Ohio, have been waging a two-person race for the top job since the House voted to remove McCarthy last week. The former speaker said Monday he’d return to the role if that was the will of the party.