October 11, 2022

Daily Market Commentary

Canadian Headlines

  • Royal Bank of Canada expects to gain more market share in the UK wealth-management business in the years ahead, with its technological capabilities key to attracting clients. Canada’s largest bank recently completed its 1.6 billion-pound ($1.8 billion) acquisition of Brewin Dolphin Holdings Plc, vaulting its wealth-management operation to the No. 3 spot in the UK and Ireland. Still, the industry in the UK remains “very fragmented” with “lots of market share up for grabs,” said Doug Guzman, head of Royal Bank’s wealth-management, insurance and investor, and treasury-services businesses. Royal Bank, which says its wealth business is ranked sixth in the US by assets under administration, also sees market share available there, Guzman said. The firm’s plan in the US includes increasing its adviser base and adding new capabilities such as a system that the bank added in recent years to let clients borrow against their investment portfolios with a few clicks.
  • Brookfield Asset Management Inc. and DigitalBridge Group Inc. have expressed joint interest in buying a stake in Vodafone Group Plc’s wireless towers unit, people familiar with the matter said. The infrastructure specialists are weighing making a binding offer for part of Frankfurt-listed Vantage Towers AG via their portfolio company GD Towers, the people said, asking not to be identified discussing confidential information. Brookfield and DigitalBridge agreed to buy a majority stake in GD Towers from Deutsche Telekom AG earlier this year. Vodafone plans to sell part of its roughly 82% interest in Vantage and has invited suitors to participate in an auction process. US telecommunication infrastructure operator American Tower Corp., as well as private equity firms KKR & Co., Global Infrastructure Partners and EQT AB, are among those interested in the business, Bloomberg News has reported. Spain’s Cellnex Telecom SA has also studied the feasibility of an offer.

World Headlines

  • European stocks declined for a fifth straight session as bond yields jumped amid concerns of persistently high inflation as well as the impact of hawkish central bank policies on global growth. The Stoxx Europe 600 Index was down 0.6% by 9:25 a.m. in London, with miners and energy underperforming as commodities retreated. Semiconductor stocks were under pressure again following a global selloff on the back of new curbs on China’s access to US technology. The Stoxx 600 has erased its early October gains on fading optimism that weaker-than-expected economic data will push central banks to be less aggressive with rate hikes. Focus this week will be on minutes of the Federal Reserve’s September policy meeting and key US inflation figures.
  • Stocks fell, pressured by rising Treasury yields amid concerns of persistently high inflation and signs that company earnings were set to disappoint. A gauge of the dollar climbed to the highest this month. Futures on the S&P 500 and Nasdaq 100 down by about the same magnitude, pointing to another risk-off day on Wall Street. In US premarket trading, Meta Platforms Inc. slipped with other big tech names sensitive to rising rates. The mood is fragile ahead of Thursday’s US inflation data, with the case for another 75 basis-point rate hike likely to be strong if the reading comes in higher than forecast. Fed officials until now show little sign they are in a mood to pause the rate-hiking cycle despite the potential hit to economic growth.
  • Asian equities headed for a third day of declines amid a continued selloff in semiconductor shares, with markets in Taiwan, South Korea and Japan declining as trading resumed after holidays. The MSCI Asia Pacific Index dropped as much as 2.2%, with a technology sub-gauge falling more than 4%. Chip-related stocks in the region declined in the wake of fresh curbs on China’s access to US technology. The Hang Seng Tech Index also fell more than 3% amid the geopolitical tensions. Hong Kong’s benchmark gauge slipped after a state-owned newspaper endorsed China’s Covid-Zero policy for the second day in a row, quashing investors’ hopes for a relaxation around the upcoming Communist Party congress. Chinese shares edged higher.
  • Oil slumped as concerns over a global slowdown and weaker demand vied with a tightening supply outlook after OPEC+ cut output. West Texas Intermediate traded below $90 a barrel, after falling 1.6% on Monday. JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon said the US and global economies are likely to sink into recession next year, while the International Monetary Fund and World Bank saw rising risks of a slowdown. There was weakness across markets, with stocks falling, pressured by rising treasury yields, while the dollar climbed to its highest in a month, making commodities priced in the currency more expensive. Oil hit the lowest level since January last month as slowdown concerns gathered force, only to rebound after the Organization of Petroleum Exporting Countries and its allies responded by reducing output. Investors are gauging the impact of higher interest rates as central banks including the Federal Reserve fight inflation, as well as disruptions caused by the war in Ukraine and the outlook for global supply heading into the northern-hemisphere winter.
  • Gold held near the lowest in a week on pressure from a stronger dollar and the outlook for higher interest rates. Bullion has lost about a fifth of its value since hitting this year’s high in March, hurt by the Federal Reserve’s relentless interest-rate hikes. The metal steadied on Tuesday, following a slump the previous day, with the greenback extending gains as poor sentiment weighed on equity markets. The amount of gold held in exchange-traded funds has contracted for the past 17 weeks, the longest stretch since 2018. That signals dwindling investor appetite, and more Fed tightening could further curb the metal’s appeal.
  • Credit Suisse Group AG faces a capital shortfall of as much as 8 billion Swiss francs ($8 billion) in 2024, analysts at Goldman Sachs Group Inc. estimate, underscoring the challenges for the troubled lender as it nears what’s likely to be a deep restructuring. At the very least, the Zurich-based firm is facing a hole of 4 billion francs, given the need to restructure the investment banking operations at a time of “minimal” capital generation, analysts led by Chris Hallam wrote. That means it would be “prudent” for the lender to raise capital. The firm is exploring radical cuts to its volatile investment bank, including spinning off large parts and hiving off its securitized products group, as Chief Executive Officer Ulrich Koerner seeks to put an end to years of scandals and losses. Yet with a key question — how to pay for it — unanswered roughly two weeks before he’s due to present his plan, speculation about the lender’s financial strength has sent its shares on a rollercoaster ride.
  • Delta Air Lines Inc. is investing $60 million in urban air taxi developer Joby Aviation Inc. in the latest partnership between a traditional carrier and an upstart trying to revolutionize how people travel. Delta could boost its investment to as much as $200 million when certain milestones are achieved in the partnership, which will be exclusive for at least five years, the companies announced Tuesday. The goal is to begin flying customers to and from airports in New York and Los Angeles using Joby’s four-passenger electric-powered vehicle as soon as it’s certified, which the company expects as soon as 2024. Delta joins United Airlines Holdings Inc. and American Airlines Group Inc., which have reached similar agreements with flying taxi manufacturers. Unlike those earlier deals, Joby will operate the flights and Delta isn’t planning to acquire any of the aircraft.
  • Cathie Wood bought another tranche of Adobe Inc. shares as the stock languishes near its mid-September low when it cratered after announcing its biggest ever acquisition. Wood’s Ark Next Generation Internet ETF bought 23,605 Adobe shares on Monday, nearly a month after the software product maker said it would buy software design startup Figma Inc. in a deal valued at about $20 billion, according to Bloomberg data. Ark Investment Management LLC was holding less than 1,200 shares of the company at least since mid-2021 before the recent purchases, Bloomberg data showed.
  • Goldman Sachs Group Inc. analysts say it’s “too early” to price in a dovish turn in Federal Reserve policy as the economic outlook isn’t bad enough yet, and rates markets remain too volatile. Wide fluctuations in rates have meant that expectations for higher return on equities over relatively safer assets have probably been lowered, strategists including Cecilia Mariotti wrote in a research note Monday, while adding that the company maintains an underweight on stocks. Speculation Fed policy will turn friendlier toward equities has seen the S&P 500 Index eke out gains from time to time over the past 12 months, but all those rallies have been sold into with the gauge making new lows every time. The US central bank looks on track to deliver its fourth straight 75 basis-point hike at the November meeting.
  • Optimism among US small businesses edged up in September as firms grew less downbeat about the outlook for sales, while a smaller share said they raised prices. The National Federation of Independent Business overall optimism index rose 0.3 point to 92.1 last month, the group said in a report Tuesday. Five of the gauge’s 10 components increased. Despite rising for a third-straight month, the measure is historically low. The survey’s inflation metrics continued to ease. The net share of owners raising prices fell 2 percentage points to 51%, the lowest in a year but still well-elevated. Almost a third of owners plan to increase prices in the next three months, the smallest share since January 2021, and labor compensation plans also eased.
  • US officials won’t lead a walkout from high-level international meetings in Washington this week to protest Russia’s participation, as they did in April. The last time Group of 20 finance ministers gathered in Washington, Treasury Secretary Janet Yellen — joined by officials from the European Union, UK, Germany, Canada, the Netherlands and Ukraine — walked out of the room to protest Russia’s invasion of Ukraine when a Moscow official began addressing the gathering. G-20 ministerial gatherings will again take place in the US capital this week alongside the annual meetings of the International Monetary Fund and World Bank. They convene as the global economy slides toward recession while Russia’s war in Ukraine continues to add to high energy and food prices. But this time, Yellen will keep her seat.
  • Israel said it reached “an historical agreement” with Lebanon after both sides approved the latest draft of a US-brokered deal that settles a maritime border dispute in a gas-rich part of the Mediterranean Sea. The accord could pave the way for both countries to ramp up offshore gas production, including Israeli exports to Europe, which is desperate for more supplies after Russia cut flows after invading Ukraine. Israeli Prime Minister Yair Lapid said in a statement that the agreement will “inject billions into Israel’s economy,” while a tweet from the Lebanese president’s office said that it “preserves its rights to its natural wealth.”  Under the deal, Israel should be able to begin extracting natural gas from the offshore Karish field, without threats of attacks by Hezbollah, the Iranian-sponsored Lebanese militant group. It would also ensure that Lebanon, through a TotalEnergies SE-led consortium, can start exploring the Kana field, and pay royalties to drill in the sections in Israel’s territory.
  • Airbus SE jetliner handovers increased in September, while remaining short of the monthly average needed to reach an already downgraded year-end goal. The planemaker delivered 55 aircraft, up from 39 in August, it said Monday, confirming an earlier Bloomberg report. That takes the net tally to 435, meaning it must ship an average 88 per month to hit the annual target of 700. Airbus is clinging to the goal even as labor and raw-material shortages at suppliers make boosting production tougher. While a year-end push is far from unusual, the scale of this year’s challenge stands out, with Chief Executive Officer Guillaume Faury saying last month that hitting 700 jets leaves “a hell of a lot of work to be done.”
  • The Bank of England is expanding the scope of its bond purchases to include inflation-linked debt in an effort to avert what it called a “fire sale” that threatens financial stability. It’s the second time this week the central bank has added to its arsenal of tools aimed at curbing market turbulence. The move, coming on the heels of Monday’s record selloff in inflation-linked debt, had the immediate effect of bringing some calm to the market.  The yield on 10-year inflation-linked securities dropped as much as 12 basis points after the BOE announcement, while a sale of £900 million of inflation-linked 30-year bonds from the government then saw strong investor appetite. Conventional debt initially also rallied, before paring gains, showing sentiment is still fragile.
  • Bob Michele, the outspoken chief investment officer of J.P. Morgan Asset Management, has a warning: the relentless dollar could forge a path to the next market upheaval. Michele has been in de-risking mode, sitting on a pile of cash which is near the highest level he has held in 10 years. And he is long the dollar. While a market crisis sparked by the greenback is not his base case, it’s a tail risk that he is monitoring closely. Here’s how it could happen: Foreigners have snapped up dollar-denominated assets for higher yields, safety, and a brighter earnings outlook than most markets. A big chunk of those purchases are hedged back into local currencies such as the euro and the yen through the derivatives market, and it involves shorting the dollar. When the contracts roll, investors have to pay up if the dollar moves higher. That means they may have to sell assets elsewhere to cover the loss.
  • Just before Elon Musk revived his proposal to buy Twitter Inc. last week, the billionaire accused the company of ordering a whistle-blower to destroy evidence of its missteps as part of a $7.8 million severance package. Peiter Zatko, Twitter’s ex-head of security, said he burned 10 handwritten notebooks and deleted 100 computer files at the behest of company managers as part of his separation agreement, according to Oct. 3 court filings that were unsealed Monday. The books contained notes of the whistle-blower’s meetings with company counterparts during his year-long tenure as security chief, the filings show. Zatko has been at the center of Musk’s arguments that Twitter misled him about a raft of operational problems at the social-media platform — which justified walking away from the $44 billion buyout. The billionaire then reversed course last week and agreed to buy the company for the original $54.20-per-share price.
  • Mercedes-Benz AG sales rose by more than a fifth during the third quarter, piercing through ongoing supply-chain bottlenecks and an increasingly negative economic outlook as consumers battle surging inflation. The luxury-auto maker delivered 517,800 vehicles globally in the third quarter, up 21% compared to the same period a year ago with demand in China leading strong growth in all key regions, Mercedes said Tuesday. In Europe, where multiplying energy bills are affecting buyers, deliveries still rose some 18% as automakers catch up on orders after months of severe shortages of semiconductors hampering output. While many automakers still report firm demand, consumer confidence measures in major markets are around record lows amid surging inflation. Central banks in Europe, the U.K. and the U.S. are raising interest rates in a bid to tame price rises, moves that should reduce demand for big-ticket items like cars.
  • General Motors Co. plans to compete with Tesla Inc.’s solar Powerwall business by offering its own sun-generated power and storage system starting late next year. A new business unit, called GM Energy, is working with SunPower Corp. to provide solar panels and home energy storage for residential and commercial users, the company announced in a statement. It’s similar to Tesla’s energy business, in which panels built by the automaker charge a battery that supplies homes with electricity at night or during blackouts. For GM, it’s a way to get into the energy-storage business while serving electric vehicle owners and giving them a cheaper way to charge their vehicles. As part of the initiative, GM is also cutting deals with utilities to enable buyers of its EVs to use their vehicle’s battery to power the home if there is a blackout.
  • A global dealmaking plunge is forcing the high-grade loan market back to basics and piling more pressure on lenders already saddled with debt from a slate of troubled deals. The value of global acquisitions has dropped about 29% compared with the same time a year ago, according to data compiled by Bloomberg, amid widespread market volatility that’s left firms dealing with soaring interest rates and the effects of inflation. That’s led to a corresponding drop in new business for banks arranging high-grade loans backing deals, with a massive 55% slump in such financing in the US year-to-date compared with the same period in 2021 and a similar plunge in Europe.

 

 

*All sources from Bloomberg unless otherwise specified