The Daily – October 19, 2022

October 19, 2022

Daily Market Commentary

Canadian Headlines

• Canadian heavy crude exports from US Gulf Coast ports have sharply rebounded as India takes advantage of sharply discounted prices, according to oil-tracker Vortexa. A total of 3.3 million barrels of Access Western Blend, a crude grade produced in the oil sands of Alberta, are scheduled to arrive in India next month after departing the US Gulf, according to Vortexa Ltd. Canadian heavy crude’s discount to West Texas Intermediate crude on the Gulf Coast expanded to a record, prompting Indian refiners to opportunistically increase purchases, Rohit Rathod, a Vortexa analyst, wrote in an email. With international sanctions on Russian crude scheduled to tighten within weeks, some Indian refiners have halted purchases of the nation’s oil.

World Headlines

• European stocks struggled for direction on Wednesday as investors questioned whether corporate earnings would be resilient enough to withstand the impact of hawkish central banks. The Stoxx 600 Index was up 0.1% at 11:22 a.m. in London, erasing earlier declines, with technology and chemicals stocks outperforming. UK banks were under pressure following a The Financial Times report that the Treasury was considering a potential 33% effective tax rate for lenders. Currently they pay 27%. Lloyds Banking Group Plc fell 3.6% and Barclays Plc was down 1.3%. Europe’s benchmark index has slumped into a bear market this year as investors worry that scorching inflation and aggressive central-bank policy tightening would fuel a global recession. Investors are also monitoring political turmoil in the UK as embattled Prime Minister Liz Truss faces a brewing parliamentary rebellion if she is forced to abandon a key Conservative manifesto commitment on pensions as part of a frantic austerity drive.
• US equity futures fluctuated as investors weighed concerns about scorching inflation and a looming recession against a strong start to the earnings season. The pound fell after UK inflation rose faster than economists expected. Contracts on the S&P 500 dipped, giving up gains of more than 1%, while those on the Nasdaq 100 were steady. Netflix Inc. rallied in New York premarket trading after reporting a surge in subscribers. United Airlines Holdings Inc. jumped after quarterly profit beat estimates. Tesla Inc. is among companies with earnings due later Wednesday. European stocks struggled to eke out a fifth day of gains. Treasury yields held near multi-year highs before the publication of US housing data for September and the Fed’s Beige Book. The yield on the 10-year rose to the highest since June 2008, while the dollar strengthened.
• Asia stocks fell, with shares in Hong Kong dropping the most in the region as the maiden policy speech by the territory’s leader failed to ease concerns about China’s earnings outlook and rising mainland Covid cases. The MSCI Asia Pacific lost as much as 0.8%, erasing an earlier gain, as shares of technology companies such as Alibaba, Tencent and TSMC weighed. A selloff in consumer stocks dragged down Hong Kong and China gauges as a plan unveiled by Chief Executive John Lee to woo back foreign talent and ease housing woes failed to offset concerns about earnings and Covid. Benchmarks in Japan and Australia rose in tandem with gains in Wall Street.
• Oil extended its volatile run as continued US efforts to curb prices and concerns over a global recession counter signs of tight supply. West Texas Intermediate swung between gains and losses, with prices oscillating within a $17 band since late-September. The mixed picture is also showing in the shape of the futures curve — while key timespreads are indicating supply restrains, several gauges have softened to the weakest levels since late September in recent days. Crude has pulled back from its recent highs, with the market remaining caught between the twin forces of production cuts by the Organization of Petroleum Exporting Countries and its allies alongside the looming threat of a major slowdown in global growth. Meanwhile upcoming European Union sanctions on Russian oil exports could send shockwaves through the global tanker market, and have already caused some Indian refiners to halt spot purchases before the latest sanctions take effect early December.
• Gold fell to the lowest in more than three weeks as UK inflation returned to double digits, intensifying pressure on the government and central bank to act. Gold fell as much as 0.9% to the lowest since Sept. 28 as data showed UK consumer prices in September matched a 40-year high and exceeded economists’ expectations. The figures add to pressure on policy makers to lift interest rates significantly, weakening the attraction of non-interest bearing gold. The dollar has continued to strengthen, rising 0.3% on Wednesday, after a slew of US economic data reinforced expectations of the Federal Reserve’s hawkish policy path. The central bank’s tightening stance has weighed on bullion this year by pushing up the greenback and bond yields, causing the metal to slide about 20% from a high reached in March.
• The euro zone’s first-ever brush with double-digit inflation was revised away by a fraction in a fuller sample of data for September that still revealed rampant price pressures bearing down on the region. The annual rate of increase, which remains a record in the history of the single currency, is now measured at 9.9% instead of 10%, Eurostat said in a statement on Wednesday in Luxembourg.  The escape from double digits may be brief as the region’s energy crisis continues to inflict huge cost surges onto consumers. Given that background, such a marginal downward revision is unlikely to distract European Central Bank policy makers preparing to raise interest rates next week by as much as 75 basis points.
• US mortgage rates continued to climb last week, advancing to a two-decade high and escalating the downturn in the housing market. The contract rate on a 30-year fixed mortgage jumped another 13 basis points to 6.94% in the week ended Oct. 14, marking the ninth-straight increase, according to Mortgage Bankers Association data released Wednesday. That pushed down the group’s gauge of applications to purchase or refinance a home by 4.5%, the ninth drop in 10 weeks, to remain at the lowest level since 1997.
• US equities are pricing in the highest odds of a recession than any other asset class and may be poised for more losses, according to Citigroup Inc.’s quantitative strategists. “US equities have priced the most (but not enough) recession risk, and earnings estimates have further to adjust,” strategists including Alex Saunders wrote in a note dated Oct. 18. “US bonds have priced the least risk, but it will take some time before bonds react to recession risks given the hawkish Fed.” A Bloomberg survey of mainly Wall Street economists puts the probability of a recession in the coming year at 60%, up from 50% a month earlier. Although standard yield-curve probit models signal a 34% chance, according to Citi. Bloomberg Economics’ Eliza Winger and Anna Wong are more bearish, putting the chance of recession at 100% in the next 12 months.
• Netflix Inc. is growing again, and Hollywood can breathe a sigh of relief. The streaming leader added 2.41 million customers in the third quarter, exceeding internal forecasts as well as expectations on Wall Street. Netflix grew in all regions of the world and said in a shareholder letter on Tuesday that it expects to sign up another 4.5 million globally this period. While Netflix isn’t growing as quickly it was a couple years ago, the world’s most popular TV network is back on a positive trajectory. More customers are signing up than earlier in the year, the company said Tuesday. That’s good news for investors in Netflix and its peers who suffered steep stock-market losses earlier in the year.
• Procter & Gamble Co. posted sales that beat analyst estimates while warning that full-year earnings will come in at the low end of its forecast because of currency fluctuations and higher inflation. P&G, the maker of Tide laundry detergent and Pampers diapers, reported $20.6 billion in sales in the quarter ended Sept. 30. While revenue rose, volume declined from a year ago — an indication that gains are being powered by higher prices to consumers. The company now sees profit toward the lower end of its forecast range of $5.81 to $6.04 in its current fiscal year due to currency effects. Foreign exchange, along with higher material and commodity costs, are seen adding an extra hit of $3.9 billion after tax this year. That’s $600 million higher than P&G’s prior guidance.
• Qatar is in advanced talks to buy around $2.5 billion of state-held stakes in Egypt’s biggest mobile network operator and other companies, as the North African nation lines up funding to cope with the economic fallout of Russia’s invasion of Ukraine. Under the potential pact, which is expected to be finalized by the end of this year, Qatar Investment Authority would acquire 20% in Vodafone Egypt from Telecom Egypt Co., according to people with knowledge of the matter. The QIA is the Gulf state’s sovereign wealth fund and oversees an estimated $445 billion in assets. A deal would be a boost for Egypt’s troubled economy, which is grappling with soaring food and fuel bills after Russia’s invasion of Ukraine and an exodus of foreign investors in its local debt. Gulf Arab states have already pledged upward of $20 billion in deposits and investments, while Egypt is close to securing sorely needed International Monetary Fund assistance.
• Spirit Airlines Inc. shareholders are poised to vote on a proposed $3.8 billion cash sale to JetBlue Airways Corp., a milestone for a deal that has already encountered numerous pitfalls. While there’s little doubt that investors will approve the tie-up at a virtual meeting Wednesday, a successful vote would still signal progress after Spirit failed to secure support for a separate deal earlier this year with Frontier Group Holdings Inc. Spirit rescheduled balloting multiple times for that proposal, which was eventually called off in July as JetBlue sweetened its own offer. A green light from shareholders would let the carriers focus on securing federal antitrust approval for the combination — a far bigger hurdle given the anti-consolidation stance taken by the Biden administration. They’ll need to convince the Justice Department that the merged airline won’t have enough market concentration in some cities to give it an unfair pricing and competitive advantage.
• The Biden administration plans to release 15 million barrels from US emergency reserves, and may consider significantly more this winter, in an effort to ease high gasoline prices that have become a liability for Democrats in next month’s midterm elections. President Joe Biden will announce the plan Wednesday, senior administration officials told reporters Tuesday evening on condition of anonymity to preview his remarks. It’s the final tranche of oil from a program the White House began in the spring to release a total of 180 million barrels of crude from the Strategic Petroleum Reserve to address high gas prices stemming from Russia’s invasion of Ukraine among other factors.
• The burgeoning market for sustainable jet fuel will soon reach a milestone, with a plant capable of turning out for the first time a lower-emission fuel at the same price as fossil fuel-based options. But this price parity will only come as result of a $50 million grant from Bill Gates-led Breakthrough Energy, alongside support from discounted loans and other financial subsidies. LanzaJet, the startup backed by Breakthrough, is building its first commercial plant in the US state of Georgia and expects to begin production next year. The facility will double the current US capacity for making sustainable aviation fuel, or SAF. While the global aviation sector is responsible for only about 3% of the gases that are warming the planet today, its emissions are rising fast. In a world that needs to reach net-zero emissions to avoid the worst effects of climate change, green solutions are desperately needed to meet the increasing demand for flying.
• A surge in bad loans awaits UK banks as higher interest rates saddle homeowners with an estimated £52 billion ($58.6 billion) of added mortgage payments over the next three years, an analyst warned as he downgraded his ratings on several lenders. The jump in costs will help push the personal debt service burden toward about 10% of post-tax income and further into the “dangerous territory” traditionally associated with large increases in impairments, Keefe, Bruyette & Woods analyst Ed Firth wrote in a note to clients on Wednesday. He cut his estimated earnings for British banks by 38% for 2023 and 26% for 2024. Shares of UK lenders have tumbled in recent weeks following a surge in gilt yields spurred by a chaotic government push to cut taxes, since largely abandoned, as the Bank of England also raises interest rates aggressively to tamp down on inflation. While higher borrowing costs swell the margins that banks earn on their loans, they also threaten to drive up defaults as loans become more expensive to pay back and economic activity slows.
• Beijing’s Covid-19 infections swelled to the highest in four months, stoking concerns about potential curbs for the capital as the flareup worsens in the middle of the twice-a-decade party congress. The city detected 41 cases on Tuesday, according to the municipal health commission, the most since mid-June. While no major restrictions have been implemented so far, buildings and compounds connected to positive patients, as well as their close contacts, have been locked down. The capital has also shut one primary school after multiple students were infected, and officials have vowed to strengthen virus controls at educational institutions. Beijing’s Center for Disease Control and Prevention has warned there are multiple transmission chains in the city and efforts to rein in transmission could be complicated.
• Nomura Holdings Inc. strategists have joined their peers at Morgan Stanley in calling a bottom for battered Asian equities, including chipmakers. The Japanese broker said the asset class may bottom “in the next few weeks” after reviewing indicators on the last 12 US recessions and five chip cycles. Morgan Stanley strategists including Jonathan Garner made a similar call in an Oct. 4 note amid “abundant” signs of extreme selling. The risk-reward is “quite attractive on Asian stocks” for an investment horizon of more than a year, strategists including Chetan Seth wrote in a note dated Oct. 18. A sustained recovery “may occur sometime in the first half of 2023” assuming no delays in China’s reopening and that a US recession doesn’t go beyond the year, they added.
• The Federal Reserve’s influential staff judges that under the surface the US economy is running even hotter than they thought, helping to explain why inflation remains at a 40-year high and providing reason to expect even more interest-rate hikes. Tucked within 12 dense pages describing the Fed’s September policy meeting last week was a statement concerning a seemingly innocuous yet vital estimate that the staff use as a building block for internal economic forecasts. Their gauge of US potential output was “revised down significantly,” the minutes showed, due to disappointing productivity growth and slow gains in labor force participation.
• Mitsubishi UFJ Financial Group Inc. is evaluating an acquisition of some loan portfolios from Credit Suisse Group AG to expand its business in the US, according to people with knowledge of the matter. Japan’s biggest lender is also vetting bundles of the Swiss bank’s global loans in sectors including aviation and pension funds, said one of the people, who asked not to be identified discussing private information. MUFG has held initial discussions with potential advisers, another person said.
• Nestle SA Chief Executive Officer Mark Schneider said inflation will remain an issue in 2023 even after the world’s largest food maker pushes through the biggest price increases in decades this year. “This is a situation no one wished for,” CEO Mark Schneider said in an interview with Bloomberg Television. “We are seeing huge upward pressure on energy, some of the agricultural commodities and also transportation costs.” The volume of goods sold eased by 0.2% in the third quarter as Nestle raised prices 9.5%. Until now, consumers have been willing to absorb higher costs despite a spike in inflation that’s squeezed household budgets and lifted manufacturers’ raw material costs.
• Weed is coming to US gas stations. Circle K, the global convenience-store chain, signed a deal with Green Thumb Industries Inc., one of the largest US cannabis producers, to sell licensed marijuana at its Florida gasoline retailers. The partnership will begin next year with 10 of the company’s 600 locations in the state, Green Thumb said. The deal is a global first, given that legal marijuana has so far been sold only in stand-alone dispensaries in the US and within pharmacies in countries such as Uruguay and Germany. By selling marijuana, which is still illegal at the federal level, at gas stations where consumers buy staples like snacks and cigarettes, the partnership may help push the drug further into the mainstream.

 

 

*All sources from Bloomberg unless otherwise specified