October 12, 2021

Daily Market Commentary

Canadian Headlines

• More than 75% of Canadians say that Prime Minister Justin Trudeau’s government should ban China’s Huawei Technologies Co. from taking part in the build-out of fifth-generation telecommunications networks, a new poll shows. Opposition to Huawei’s participation in 5G is up from 53% in 2019, according to the poll by Nanos Research for the Globe and Mail released on Monday. Trudeau hasn’t ruled out including Huawei and is expected to make a decision soon. The surge in disapproval of Huawei reflects public outrage that has simmered since December 2018, when China imprisoned Canadian business executives Michael Spavor and Michael Kovrig within days of Canada arresting Huawei Chief Financial Officer Meng Wanzhou on a U.S. extradition request. The two Michaels, as they were known, were held in grim conditions for more than 1,000 days.

World Headlines

• European stocks slumped afresh as worries bubbled that rising inflation could drag on the region’s recovery, and a widening regulatory crackdown in China kept sentiment depressed. The Stoxx 600 Index slid 0.3% at 10 a.m. London time. A dip in metals prices weighed on basic resources stocks, amid concern that rising inflation along with muted growth could stall the rally in commodities, while the technology sector and banking stocks were also on the back foot. A decline in oil stocks was cushioned as the crude held above $80 a barrel, though higher prices weighed on shares of airline operators. Anxiety over spiking inflation, rising bond yields and China have deflated European stocks in the past six weeks. The Stoxx 600 has made little headway in October and is 4.5% below its August record. With the third-quarter earnings season just around the corner, inflation is top of investors’ minds, and the focus is on whether company profits could take a hit from rising costs amid supply chain disruptions.
• U.S. equity futures rose Tuesday, as traders assessed inflationary pressures from rising energy prices and signs of widening regulatory scrutiny by China. Contracts on the Nasdaq 100 outperformed S&P 500 futures after both erased an earlier loss. Global markets are struggling to shake off worries that inflation — spurred by an energy crunch and pandemic-related supply-chain snarls — will sap company profits and economic expansion. Financial firms this week will kick off the third-quarter earnings season, heralding a key test of investor confidence. Upcoming reports on the U.S. consumer-price index and retail saleswill help inform expectations about the likely timeline for Federal Reserve tapering and any eventual rate hikes.
• Asian stocks fell, halting a three-day rally as uncertainty over earnings deepened amid elevated inflation, higher bond yields and the risk of a widening Chinese crackdown on private industry. The MSCI Asia Pacific Index slid as much as 1.2%, led by technology and communication shares. Alibaba plunged 3.9% following a rally over the past week, while Samsung Electronics tumbled to a 10-month low after at least five brokers slashed their price targets, as China’s power crisis is seen worsening supply-chain disruptions. Shares in Hong Kong and the mainland were among the worst performers after Chinese authorities kicked off an inspection of the nation’s financial regulators and biggest state-run banks in an effort to root out corruption.
• Oil in New York held above $80 a barrel on expectations that a power crisis from Asia to Europe will lift demand, prompting banks to boost their price forecasts.  Futures were little changed after closing 1.5% higher on Monday. Demand is being supported ahead of the northern hemisphere winter by shortages of natural gas and coal, triggering a need for alternative power generation fuels such as diesel and fuel oil. Caution from the Organization of Petroleum Exporting Countries and its allies in restoring supply is adding to upward price pressure. The mismatch in demand and supply could quickly drain inventories. The gapbetween West Texas Intermediate’s two nearest contracts has widened in recent days in an indication that stockpiles at the key U.S. storage hub of Cushing, Oklahoma, are set to shrink.
• Gold prices on Tuesday rose by Rs 179 to Rs 47,230 per 10 grams in futures trade, as speculators created fresh positions amid firming spot demand.
• The European Union drew record demand for its debut green bond, in the sector’s biggest-ever offering. The bloc registered more than 135 billion euros ($156 billion) in orders Tuesday for a sale of 12 billion euros of securities maturing in 2037. Both the demand and size eclipse last month’s debut from the U.K. The transaction is just the first in a 250-billion-euro program of EU green-bond sales earmarked for the coming years. “This will be the largest green bond out there and it will provide investors with one of the most — or the most — liquid green bonds,” said Julian Kreipl, a credit analyst at UniCredit SpA in Munich.
• Merck & Co.’s promising Covid pill is already being snapped upby some countries, raising concern that poorer nations could be left behind in a repeat of the inequitable vaccine rollout. Thailand cases dropped to a three-month low as the country prepares to end quarantine rules for vaccinated visitors. Hong Kong is letting vaccinated people remove masks at gyms, as frustration grows over the city’s zero-tolerance approach. India’s infection rate declined to the lowest in seven months. The U.K. government made serious mistakes in its early handling of the pandemic, a parliamentary inquiry found.
• The owner of Kay Jewelers and Zales agreed to buy Diamonds Direct USA Inc. from Blackstone Inc. and other shareholders for $490 million, betting on a robust return of the U.S. bridal business as pandemic restrictions subside. The cash deal will add 22 stores and 500 employees to Signet Jewelers Ltd.’s network. It will also bring higher-end bridal customers who typically spend more on engagement rings and other wedding accoutrements than shoppers at the company’s other brands, according to Chief Executive Officer Gina Drosos.
• LG Corp. companies that supply batteries to General Motors Co.set aside 1.1 trillion won ($918 million) to cover costs related to the recall of Chevrolet Bolt electric vehicles, reassuring investors concerned about a rift between the South Korean conglomerate and a major carmaking customer. LG Chem Ltd.’s battery unit LG Energy Solution said Tuesday it will book 620 billion won in charges after fires led GM to recall more than 100,000 Bolts. LG Electronics Inc., which packaged LG Energy’s cells into modules, separately booked 480 billion won in costs as it released third-quarter earnings that missed analysts’ estimates. Including the initial costs reflected in their second-quarter earnings, the LG group companies have now booked a total of 1.4 trillion won in recall-related provisions. LG Energy said it will now resume the process of pursuing an initial public offering and strengthen its partnership with GM. The automaker estimated in August that replacing batteries would cost about $1 billion and that it planned to seek reimbursement from LG.
• GlaxoSmithKline Plc’s consumer unit is drawing interest from private equity firms as the pharma giant prepares to split off the business, people with knowledge of the matter said. The London-listed drugmaker’s advisers are informally fielding interest in the operations alongside preparations for a listing, the people said, asking not to be identified because the information is private. Advent International, Blackstone Inc., Carlyle Group Inc., CVC Capital Partners, KKR & Co. and Permira are among potential suitors evaluating the business, according to the people. The consumer unit could also attract some of the world’s biggest pharmaceutical and consumer goods companies, the people said. The unit could be valued at 40 billion pounds ($54 billion) or more in any deal, the people said.
• Chinese electric-vehicle maker Leapmotor is considering an initial public offering in Hong Kong that could raise at least $1 billion, according to people familiar with the matter. The startup, whose backers include video surveillance company Zhejiang Dahua Technology Co. and Sequoia Capital China, has held initial discussions with advisers about the IPO, the people said, asking not to be identified as the information isn’t public. A listing could come as soon as next year, they said. Details such as fundraising amount and timing are preliminary and subject to change, the people added. A representative for Leapmotor declined to comment on the potential IPO, while Dahua did not immediately reply to requests for comment.
• It’s taken just a few short months for stagflation to go from hobgoblin of cranks to a full-blown Wall Street obsession. Everyone seems worried about it. Bridgewater Associates co-Chief Investment Officer Greg Jensen says spiraling prices that choke off growth are a “real risk” that many portfolios are massively overexposed to. A “fairly strong consensus” of market professionals believe that some kind of stagflation is more likely than not, according to a Deutsche Bank AG survey. And while Goldman Sachs Group Inc. urged investors to buy the dip, strategists said “stagflation” was the most common topic in client conversations. Wherever you fall on the debate, alarm bells are ringing as energy prices head toward multiyear highs and persistent shortages crimp supply chains worldwide. That’s fueling price pressures and pushing up bond yields just as economic growth is cooling and central banks such as the Federal Reserve weigh scaling down pandemic-era stimulus. And after a second straight month of disappointing U.S. jobs gains, the stakes are rising heading into this week’s inflation report.
• The U.S. House is scheduled to vote on a short-term increase to the government’s borrowing limit Tuesday, averting the immediate threat of a catastrophic default but setting the stage for even bigger showdown on debt and spending in less than two months. The $480 billion increase to the government’s borrowing ability gives Congress until approximately Dec. 3 to act on temporary fix or a longer term solution before the country again faces a risk of defaulting on its obligations. The temporary patch was the result of a move by Senate GOP leader Mitch McConnell that gave Democrats additional time to handle the debt ceiling, which Treasury Department officials estimated would have been breached by Oct. 18. But he warned President Joe Biden last week that Democrats would be on their own to raise the limit again.
• The French government will help state-controlled utility Electricite de France SA develop so-called small modular nuclear reactors by 2030, betting that the technology will be exported to regions looking to accelerate their transition to cleaner fuels. The announcement, made by President Emmanuel Macron, signals that he sees nuclear power as key to reducing global carbon emissions, alongside renewable energy. It also comes as France and several central European nations are trying to convince the European Union that atomic power, which generates toxic waste but very limited carbon dioxide, should be classified as clean energy. “We need to look at different families of technologies,” Macron said in a speech in Paris Tuesday, during which he pledged that France will invest 1 billion euros ($1.16 billion) in small modular reactors, known as SMRs, and other technologies such as atomic waste recycling. “The first target is to have small reactors emerging in France by 2030.”
• Airbus SE slid as much as 2.3% after the European planemaker reported just one order and 40 deliveries in September, making it more of a challenge to meet year-end targets. The sale of a single A319neo to an unidentified buyer interrupts momentum established in August, when Airbus posted its best month for sales since the start of the Covid-19 pandemic. The September deliveries — flat with the prior month, when many plant workers went on vacation — leave Airbus with 176 left to reach its 2021 target of 600 planes. While handovers typically fluctuate from month to month, and a year-end push is not unusual, warning signs are flashing over output.
• EasyJet Plc said it will boost capacity to about 70% of 2019 levels this quarter, as the easing of travel restrictions in the U.K. triggers a surge in bookings. The Luton, England-based discount carrier generated positive cash flow in the peak summer months and losses halved compared with a year earlier, according to a statement on Tuesday. Bookings have soared to places like Egypt and Turkey and capacity to the Canary Islands is at 140% of 2019 levels for the U.K. school holidays later this month. EasyJet got a late start to summer, flying at about 58% of 2019 levels for the months of July, August and September, as its home base in the U.K. lagged behind countries in the European Union in loosening travel rules. Now it’s looking to capture pent-up demand and seize opportunities for growth, even as the industry enters the slower winter season.
• Russia’s Economy Ministry warned inflation is on course to reach nearly double the central bank’s target by year-end, fueling expectations the Bank of Russia will have to accelerate interest-rate increases next week. Driven mainly by delays in bringing in the harvest, inflation is now expected to be 7.4% at the end of the year, up from the previous forecast of 5.8%, Economy Minister Maxim Reshetnikov told reporters Tuesday in Moscow. “This is a significant increase from previous expectations, which logically should force the central bank to return to nonstandard increments in raising the rate,” said Dmitry Dolgin, chief economist at ING Bank in Moscow. “Fifty basis points is the most likely scenario.”
• China is inspecting the nation’s financial regulators, biggest state-run banks, insurers and bad-debt managers for the first time in six years to root out corruption in its $54 trillion financial system. A team led by the Central Commission for Discipline Inspection will start a two-month anti-graft check of the China Banking and Insurance Regulatory Commission, and accept complaint reports from whistleblowers until Dec. 15, according to a statement late Monday. CBIRC Chairman Guo Shuqing said the move is a reflection of the Communist Party’s focus on financial regulation and told his staff that cooperation with inspectors will be their top priority for now.
• Johnson & Johnson Chief Scientific Officer Paul Stoffels will retire at the end of the year, marking yet another prominent shift among the company’s top leadership. Stoffels, a lauded figure in both the drug development and public-health spheres, will step down on Dec. 31, according to the company. J&J has not yet named a successor for Stoffels, who’s also vice chairman of its executive committee. The announcement comes less than two months after longtime Chief Executive Officer Alex Gorsky said he’d relinquish the reins to Joaquin Duato on Jan. 3. Stoffels has taken on some of the world’s most imposing infectious disease challenges, including Covid-19, where J&J’s entry has lagged vaccines from Moderna Inc. and partners Pfizer Inc. and BioNTech SE.
• Bets against the pound are intensifying amid speculation that any Bank of England efforts to curb inflation would darken the outlook for growth and consumer sentiment. Speculators ramped up wagers on sterling’s decline at the fastest rate in more than two years, Commodity Futures Trading Commission data show, further breaking the link between anticipated rate increases and currency gains. Meanwhile, strategists at Canadian Imperial Bank of Commerce, RBC Europe Ltd. and Societe Generale SA are bracing for the pound to slump to levels last seen in late 2020. Money markets increased their expectations for BOE tightening this week, anticipating a 15-basis-point increase in December and another 50 basis points by June. That would bring the central bank’s key rate to 0.75% from 0.1% currently. Yet the prospect of several rate hikes is raising concern that rapid policy tightening will hurt confidence among consumers already grappling with soaring energy prices and supply chain disruptions.
• Lego Group will no longer target some toy sets at girls and others at boys to help break stereotypes about how children play, ending years of gender-based marketing. The decision comes after a survey commissioned by the Danish company showed that most children see toys as being for one or the other gender. Lego isn’t planning to change its products but will stop segmenting them into gender categories, Lena Dixen, a senior vice president at the world’s largest toymaker, told broadcaster TV2. Three out of four boys believe that some toys are only for girls and some are only for boys, while 62% of girls held the same view, according to the survey. Parents help perpetuate the idea: they are more likely to encourage their sons (59%) to play with Legos than their daughters (48%). Participating in the survey were 7,000 parents and children, 6 to 14 years old, from across the world, TV2 said

“Happiness depends upon ourselves.” — Aristotle

*All sources from Bloomberg unless otherwise specified