The Daily – October 17, 2022

October 17, 2022

Daily Market Commentary

Canadian Headlines

• Crédit Agricole’s asset servicing banking group CACEIS signs MoU to acquire the European asset servicing activities of RBC Investor Services, according to statement. Deal includes custody, global custody FX, fund administration, transfer agency, middle office and securities lending as well as associated Malaysian center of excellence. Together, the combined entity of RBC Investor Services and CACEIS would have around €4.8 trillion in AuC and €3.5 trillion in AuA, based on figures March 31 figures.

World Headlines

• European stocks gained on Monday with bond yields retreating as the UK government said it would reverse swathes of the tax cuts that it announced just weeks ago. The Stoxx Europe 600 index added 1.1% by 12:31 p.m. in London with utilities, insurance and autos rising most as every sector gained. The midcap UK FTSE 250 benchmark extended gains to 1.7% after new UK Chancellor of the Exchequer Jeremy Hunt confirmed the fiscal policy U-turns. The Stoxx Europe 600 has plunged 20% this year amid worries about a recession driven by surging inflation and central banks’ hawkish stance, with the region experiencing higher volatility last week following a worsening outlook for US price rises. Meanwhile, concerns around the extent of unfunded tax cuts announced in Britain last month have roiled the gilt market.
• Stocks rose, with investors preparing for a number of key earnings reports this week. US equity contracts advanced more than 1% as investors turned their focus to company results — starting with Bank of America Corp., which gained in premarket after third-quarter trading revenue beat estimates. The yield on 10-year gilts fell 36 basis points to 3.97% and the pound traded 1.1% higher at $1.1293. Treasury yields and the dollar eased against its Group-of-10 counterparts, providing a touch of respite to harried currency markets. Meanwhile, the outlook for consumer prices in the US continues to fuel bets that the Federal Reserve may make jumbo rate hikes at its next two meetings, weighing broadly on the outlook for global economic growth and markets.
• Asian equities resumed their decline, led by tech stocks, as investors analyzed Chinese President Xi Jinping’s speech at Party Congress, in which he ruled out changes to strict Covid rules. The MSCI Asia Pacific Index retreated as much as 1.4% before paring the drop, with TSMC and Keyence among the biggest drags after a broader US tech selloff last week. All sectors but real estate were in the red. Taiwan’s benchmark was a notable regional loser, ending 1.2% lower as the local currency weakened following comments by Xi’s about the island. Stock gauges in Japan fell about 1% after the Bank of Japan vowed to continue with monetary easing as the yen approached a key level. Benchmarks in Hong Kong erased losses, while gains in defense and tech stocks helped gauges in mainland China close moderately higher after Xi’s Sunday speech emphasized national security and self-reliance in core technologies. Planned steps by Chinese regulators to stem a slump in equities also buoyed sentiment.
• Oil wiped out early gains as fears over an economic slowdown continue to weigh on the outlook for demand. West Texas Intermediate futures flipped between gains and losses near $85 a barrel after earlier adding as much as 1.5%. In a speech on Sunday opening the 20th Communist Party congress, Chinese President Xi Jinping signaled no change in direction for China’s strict Covid Zero policy, a strategy that has dragged on its economy this year. Key oil market indicators in Asia are pointing to weakness as traders watch China’s buying activity for clues about demand in the world’s largest crude importer.
• Gold advanced on weakness in Treasuries and the dollar, as rising fears of a global economic slowdown boost the precious metal’s haven status. The gain comes after bullion last week traded near the lowest level since the end of September, dropping 3% amid expectations of more aggressive rate hikes by the Federal Reserve. The precious metal is down about 20% from this year’s peak in March. Gold slipped as much as 1.6% on Friday after UK Prime Minister Liz Truss sacked Chancellor Kwasi Kwarteng and prepared to reverse parts of her tax-cutting program. In the US, retail sales stalled last month amid the worst inflationary environment in decades, while a report showed year-ahead inflation expectations rose for the first time in seven months.
• Chancellor of the Exchequer Jeremy Hunt ripped up what was left of Prime Minister Liz Truss’s controversial economic program, scrapping tax cuts and removing support for household energy bills in an effort to restore order to the UK public finances. After the backlash against Truss’s plan pushed up borrowing costs for the UK government, the package of £32 billion ($36 billion) is less than half of what economists say the government may need to put government debt on a stable trajectory after soaring inflation and sputtering growth gutted tax revenue. Together with earlier U-turns, the decisions reverse almost all of the £45 billion in tax cuts and giveaways Truss announced in September, raising questions about whether she can survive in office. The only major changes left from that announcement are those that are already part way through legislation, on national insurance contributions and stamp duty. Hunt signaled he’s likely to make more severe spending cuts in the weeks ahead.
• Goldman Sachs Group Inc’s David Solomon is embarking on his third major reorganization in just four years as chief executive officer, undoing some of the signature moves he made as recently as 2020. The Wall Street giant plans to once again combine its expanded asset management and private wealth businesses into one unit run by Marc Nachmann, according to people familiar with the matter. Goldman will also fuse its investment-banking and trading operations under one group run by Dan Dees, Jim Esposito and Ashok Varadhan. The money-losing consumer unit will be broken up. The moves mark a reversal for Solomon, 60, who had forged ahead with plans to separate the asset management and wealth business two years ago despite skepticism within the bank. He was also reluctant to combine investment banking and trading into one group, as the firm looked to talk up other fee-based businesses to win over shareholders.
• Ye, formerly known as Kanye West, has agreed to buy Parler, a social media platform that has been embraced by conservatives who departed Twitter over allegations of political censorship. Parlement Technologies, the company behind Parler, announced Monday that it has entered into an agreement in principle to sell the social media platform to Ye for an undisclosed amount, while continuing to offer technical support such as cloud services. The decision by Ye to buy his own social media platform comes at a time when the biggest tech firms are struggling with how to control and manage some of their largest users.
• Morgan Stanley’s long-time equities bear says US stocks are ripe for a short-term rally in the absence of an earnings capitulation or an official recession. A 25% slump in the S&P 500 this year has left it testing a “serious floor of support” at its 200-week moving average, which could lead to a technical recovery, strategist Michael J. Wilson wrote in a note on Monday. Wilson — one of Wall Street’s most prominent bearish voices, who correctly predicted this year’s slump — said he “would not rule out” the S&P 500 rising to about 4,150 points — suggesting 16% upside from its latest close. “While that seems like an awfully big move, it would be in line with bear market rallies this year and prior ones,” he said, while retaining his overall negative long-term stance on equities.
• China will speed its efforts to build a legion of talent and win the battle to develop homegrown technologies, President Xi Jinping pledged at the Communist Party’s twice-a-decade congress on Sunday. But new US restrictions issued a week earlier are already undercutting those plans. The Biden administration’s latest salvo of sanctions includes restrictions on so-called US persons supporting the development, production or use of integrated circuits at some chip plants located in China. Effective Oct. 12, the measures are broad enough to encompass holders of US green cards as well as US residents and American citizens, capturing a wide swath of senior executives at Chinese semiconductor firms. The country will “attract the best minds from all areas to the cause of the Party and the people,” Xi said, reiterating the need to strengthen international talent exchange. Senior Chinese officials have repeatedly sought to assure overseas researchers that China is a better place for their work. Beijing pledged to beef up its push to lure talent back to China despite tight Covid-19 restrictions that have mostly sealed the country off from the rest of the world.
• Turkish President Recep Tayyip Erdogan’s 2023 draft budget provides for a dramatic increase in energy subsidies, which would enable him to keep prices subdued and bolster his prospects in next year’s elections. The Turkish government is subsidizing 80% of natural gas and 50% of electricity used by households and “the burden of energy subsidies on the 2023 budget is seen at 600 billion liras ($32 billion),” Vice President Fuat Oktay said on Monday. With about eight months to go to presidential and parliamentary elections, Erdogan is intent on shielding citizens from surging global energy costs. Turks are already enduring a cost-of-living crisis and soaring inflation, which have undermined support for the country’s longest-serving leader as he seeks to extend his 20-year rule.
• China told its state-owned gas importers to stop reselling LNG to energy-starved buyers in Europe and Asia in order to ensure its own supply for the winter heating season. The National Development and Reform Commission, the nation’s top economic planner, asked PetroChina Co., Sinopec and Cnooc Ltd. to keep winter cargoes for domestic use, according to people with knowledge of the matter who asked not to be named as the information isn’t public. While the sales had offered some relief to European buyers, rapidly filling inventories and record-high shipping costs also reduced the appeal of reshipping fuel, they said. Forecasts for a small gas supply deficit likely spurred the move by Beijing, which has pledged to keep houses warmed this winter. The resales had marked a stark turnaround for China, which last year overtook Japan to become the world’s biggest importer of LNG on the back of increased purchases on the spot market but may post its first ever drop in gas consumption in 2022.
• Bank of America Corp. reported its highest quarterly net interest income in at least a decade as the lender reaps the benefits of the Federal Reserve’s interest-rate hikes, and debt traders beat analysts’ estimates. NII, a key source of revenue for the bank, rose 24% to $13.8 billion in the third quarter on higher rates and loan growth. Analysts had expected a roughly 23% increase for NII, the revenue the bank collects from loan payments minus what it pays depositors. Higher loan revenue combined with an increase in trading revenue helped earnings beat analysts’ expectations. “We continued to see strong organic client growth across our businesses, with increased client activity helping to drive revenue up by 8%,” Chief Executive Officer Brian Moynihan said in a statement Monday. “Our US consumer clients remained resilient with strong, although slower growing, spending levels and still maintained elevated deposit amounts.”
• Mastercard Inc. debuted a service that will let consumers buy and sell digital assets through their bank accounts, potentially paving the way for thousands of finance firms to offer crypto trading for the first time. The product, called Crypto Source, will start in the US, Israel and Brazil early next year through a pilot program, Ajay Bhalla, Mastercard’s president of cyber and intelligence, said in an interview. He declined to say which banks would be the first to participate. While banks have been warming up to crypto over the past few years, the vast majority have shied away from holding virtual currencies and offering them to their retail clients because of regulatory concerns. But with thousands of bank partners, Mastercard’s service could help cryptocurrencies gain more mainstream adoption.
• Fewer than 5% of Americans got an updated Covid-19 shot in the month after the new bivalent boosters rolled out, a comparatively slow start as the Biden administration encourages more Americans to get the vaccine this month. Health authorities have said they are counting on the new Omicron-targeting boosters to protect people during the cold-weather months from hospitalizations and deaths. Yet 7.6 million people in the U.S. got the shots in the four weeks after they were cleared for use, according to the Centers for Disease Control and Prevention. By contrast, 13 million people got at least one dose during the first month of the U.S. Covid-19 vaccination program after authorizations in December 2021, though supplies were limited, according to the CDC.
• Optimism about an ad-supported subscriber tier at Netflix Inc. has recently lifted shares of the video-streaming company off multiyear lows, but that hasn’t translated to Roku Inc. Shares in the platform for streaming services on Friday closed at their lowest level since February 2019 and have lost more than three quarters of their value since the start of 2022, the 12th-biggest drop in the Russell 1000 Index. While Netflix is up 33% since the market low in mid-June, Roku has lost about the same amount since then. Netflix, which reports third-quarter results Tuesday, said last week it would charge subscribers $7 a month for the new ad-supported product, starting Nov. 3. The company’s standard service, without ads, costs $15.49 a month in the US. The move will give Netflix a new chunk of paying subscribers, plus a revenue source, advertising, that it previously had shunned.
• Moderna Inc. will provide as many as 100 million doses of Covid-19 shots that specifically target variants for vaccine alliance Gavi to distribute in lower-income countries in 2023. Under the agreement, Moderna will supply these mRNA variant-targeting shots for Gavi at the lowest of its tiered prices. The shots will then be distributed to poor countries through the Covax facility, backed by the World Health Organization to ensure vaccine equity around the world, Gavi said Monday. Gavi will also cancel the delivery of remaining volumes of vaccines under a previous agreement as health providers shift to updated shots that work specifically against Covid’s new variants. The Covax facility has so far delivered 1.8 billion doses across 146 countries. About one tenth of them are from Moderna, through purchases and donations, according to Gavi.
• Mercedes-Benz Group AG is broadening its battery-powered lineup with a sport utility vehicle that will take on Tesla Inc.’s Model Y in another step toward the automaker’s goal to go all-electric by the end of the decade. The EQE SUV, unveiled on the eve of the Paris car show, will edge out the cheaper Model Y with 590 kilometers (367 miles) of driving range and start at around €70,000 ($68,000) when sales begin late this year. It’s the fourth model to use Mercedes’ dedicated EV platform, which also underpins the flagship EQS sedan.

 

 

*All sources from Bloomberg unless otherwise specified