The Daily – October 20, 2022

October 20, 2022

Daily Market Commentary

Canadian Headlines

• Trudeau’s Bold Climate Goals Belie Minimal Progress on Emissions. Prime Minister Justin Trudeau pitches Canada as a global climate leader, one that’s adopted increasingly bold climate targets and policies under his watch. But Canada’s greenhouse gas emissions tell an entirely different story. In the seven years since Trudeau took office, emissions have plateaued while Canada’s economy has grown 8%. A cleaner electric grid coexists with even more extraction and burning of oil. But all of Canada’s peers in the Group of Seven, or G-7, have managed to achieve economic growth while simultaneously cutting emissions, and Canada’s environmental commissioner says the country is struggling to bend the emissions curve. Among the Group of 20 major economies, or G-20, Canada ranks behind only Saudi Arabia when it comes to per capita emissions, and ahead of Australia. Trudeau sees it differently, and this week he defended his track record in an interview with Bloomberg Green in Ottawa. “We put forward not just targets but a plan to reach those targets that included, for the first time, a broad-based price on pollution,” he said.
• Mercedes-Benz, Rock Tech Lithium sign an initial supply agreement for on average 10,000 tons of battery-grade lithium hydroxide per year – enough for around 150,000 electric vehicles, according to statement. Lithium hydroxide will be refined in Germany, further strengthening the localized sourcing strategy of Mercedes-Benz for EV-ramp up
• CIBC, Other Canadian Banks See 75 Bp Hike After Inflation Data. Stronger-than-expected Canadian inflation last month has tilted odds toward a 75 basis point hike at the Bank of Canada’s policy decision on Oct. 26, according to revised estimates from the country’s largest commercial lenders. On Wednesday, economists at Canadian Imperial Bank of Commerce, Bank of Montreal, Bank of Nova Scotia and Toronto-Dominion Bank issued reports predicting the three-quarter point hike. Royal Bank of Canada said it expects “at least” another 50 basis points. The more aggressive rate calls came after Statistics Canada reported annual inflation at 6.9% from a year ago, higher than economist predictions for a 6.7% gain.
• Denison Mines Corp. entered into an exploration agreement with the Athabasca Nations and Communities in respect of Denison’s exploration and evaluation activities within the traditional territory of the Athabasca Nations, according to a statement from the company. Pact “expresses the parties’ intention to build a long-term relationship between Denison and the YNLR, Athabasca Nations, and Athabasca Communities,” the company said

World Headlines

• US stocks were poised to extend Wednesday’s losses amid rising bond yields, with investors concerned that strong inflation and hawkish monetary policy will further slow the global economy. S&P 500 and Nasdaq 100 futures retreated, with Tesla Inc. sliding more than 6% in premarket trading after the electric-vehicle maker reported sales that missed Wall Street estimates. Telecommunications companies were the biggest laggards in Europe’s Stoxx 600 index, while luxury stocks outperformed after sales surged at Birkin handbag maker Hermes International. The yen weakened past the closely watched 150 per dollar level, marking a 32-year low and keeping investors on high alert for further intervention to support it. The move followed a surge in US Treasury yields to multi-year highs that.
• Tesla Drops as Musk Says Demand ‘A Little Harder’ to Come By. Tesla Inc. shares declined in early trading after the electric-car maker reported lower-than-expected revenue and acknowledged it isn’t immune from economic headwinds. Third-quarter sales rose 56% to $21.5 billion, short of analysts’ average estimate of $22.1 billion. The maker of Model 3 sedans and Model Y SUVs said it expects to come up short of its target for 50% growth in vehicle deliveries, in part because of trouble it’s having getting cars from plants to customers. Chief Executive Officer Elon Musk kicked off Tesla’s earnings call with ebullience, telling analysts he was looking forward to an “an epic end of year.” He later allowed that downturns in China and Europe and the Federal Reserve’s interest rate increases are having an effect on orders.
• The world’s biggest banks have already had to use about $30 billion of their own cash this year to fund loans for acquisitions and buyouts that they weren’t able to offload to investors. The lenders have been forced to fund at least 15 deals in the US and Europe as inflation and risk of a recession evaporates investor appetite for risky corporate debt. The total tally, based on calculations using data sourced by Bloomberg, could nearly double over the coming months as more deals are scheduled to close. While it’s not uncommon for banks to self-fund deals when market sentiment sours, the sheer amount of hung debt — including $3.9 billion for Apollo Global Management Inc.’s purchase of Brightspeed and more than $8 billion for a buyout of Nielsen Holdings Plc — is deterring banks from making new financing commitments.
• Prime Minister Liz Truss is clinging to the keys of Number 10 as further turmoil rocks her government following the removal of her home secretary, the resignation of the chief and deputy chief whips, and several public outpourings of dismay from Conservative MPs. The appointment of a new Chancellor of the Exchequer and a U-Turn on the majority of her economic plans had provided a brief respite following weeks volatility in markets and politics. But bets on the premier’s departure continue. PaddyPower places the likelihood of Truss being replaced by the end of the year at 1/8. Rishi Sunak, who ran against Truss in the Conservative leadership election this summer, remains Sky Bet’s favorites with the bookmaker paying out £7 ($7.83) for every £4 bet on the ex-chancellor. New chancellor Jeremy Hunt has climbed the list of favorites after less than a week in the role, with bets on both Hunt and Leader of the House of Commons Penny Mordaunt at 4/1.
• Fed’s Bullard Sees 2023 Shift With End of Front-Loading Hikes. Federal Reserve Bank of St. Louis President James Bullard said he expects the central bank to end its ‘’front-loading” of aggressive interest-rate hikes by early next year and shift to keeping policy sufficiently restrictive with small adjustments as inflation cools. “You do have to think about what the reasonable level is,” Bullard said Wednesday in a Bloomberg TV interview with Kathleen Hays in St. Louis, suggesting that he doesn’t currently see the need to push rates higher than officials have already projected. The goal is to move to “some meaningfully restrictive level” that will push inflation down. “But it doesn’t mean that you go up forever,” he said.
• Yen Breaks 150 Level as Intervention Speculation Ramps Up. “It’s a tricky situation for Japanese authorities. The may want to avert conveying the message that there is a line in the sand at 150.00 or any other level, as this is a risky move in such a volatile environment, said Francesco Pesole, currency strategist at ING Bank. “But the risk is that they let it fly above 150 and there you get the upward volatility they were trying to avoid in the first place. I think they’ll have to intervene now.”

• PGIM’s Hunt Says Low Growth to Be New Norm for Developed World. “We’re headed into a post-Covid regime,” Hunt, who oversees $1.3 trillion in assets, said in a Bloomberg TV interview. “It will be higher inflation, it will be still fairly low rates by historical standards and, unfortunately, we’ll go back to somewhat of a low-growth phenomena in the developed world.” Long-term investors will do best in the current environment, he said. “Over the next 18 months, the money that we put out, we think, is going to be some of the best money, actually, that we invest,” he said. “There’s room for optimism for long-term investors but you’ve got to be able to ride this out a little bit.” Hunt says investors should look at the pockets of the market that use leverage to try to identify where blowups may occur. They should do that to make sure they have enough liquidity to move in and out of those markets and to have enough dry powder to take advantage of any opportunities.
• Amazon Faces Class Action Suit Over Abuse of Secretive Algorithm. Amazon has made millions of customers pay more by hiding better deals on its website and mobile app to boost its own products, Hausfeld, the law firm behind the case, alleges. It does this by using a “secretive and self-favoring algorithm” in its Buy Box feature. Britain’s opt-out class action regime finally sparked into life last year after new laws allowed US-style claims under competition law. A flurry of cases have been filed recently including against Meta Platforms Inc’s alleged misuse of personal data and overcharging on Alphabet Inc’s Google Play Store. The suit will still need to be officially notified as a class action by a judge. The suit will be filed against the tech giant at the Competition Appeal Tribunal by Oct. 31., Hausfeld said. Damages, which are based on economists’ estimates from potential losses, could be as much as £900 million ($1 billion).

• A surprise quarterly loss by US economic bellwether and aluminum giant Alcoa Inc. added to jitters over the world economy as the metal used in everything from iPhones to Pepsi cans hits headwinds. Metals have slumped as hawkish central banks fight inflation, Europe faces an energy crisis and China’s economy struggles to recover. Goldman Sachs Group Inc. says commodities are already pricing a 5% or more hit to industrial demand in major economies, and that more declines for metals are due through early 2023. Alcoa, typically among the first of the world’s metals giants to deliver earnings, posted an adjusted loss of $60 million for what it called a “challenging quarter” with significantly lower price, higher costs for energy and raw materials
• Klarna CEO Says ‘Painful’ Restructuring Now Largely Complete. While there would continue to be “minor changes,” the May restructuring was “the big one,” Sebastian Siemiatkowski said on Bloomberg Television Wednesday. “As much as it was very painful and hard and it’s always sad to see amazing colleagues leave but what’s good about it is that we took the decision early on.” Klarna CEO Sebastian Siemiatkowski joins Emily Chang to discuss his firm’s plans. In May, Klarna announced it would be cutting its workforce by about 10%. At the time Siemiatkowski said Klarna did not “exist in a bubble” and the layoffs were an effort to mitigate the impact of inflationary pressures and the prospect of a recession in many of its markets, which had pushed the company to cut costs.
• Chinese officials are debating whether to reduce the amount of time people coming into the country must spend in mandatory quarantine, according to people familiar with the discussions, as the country’s Covid Zero policy leaves it increasingly isolated from the rest of the world. Bureaucrats are looking at cutting the quarantine period to two days in a hotel and then five days at home, said the people, asking not to be identified as the discussions are private. Currently, China requires 10 days of isolation on entry into the country, with seven days confined to a hotel room, and then another three days at home, where people are still monitored and subject to regular testing.
• Schroders Assets Shrink by £21 Billion After LDI Market Rout. The UK’s largest standalone asset manager said assets dropped to £752.4 billion from £773.4 billion in the three months through September, according to a statement Thursday. More than £20 billion of the decline came from the firm’s Solutions business, which houses its so-called liability-driven investment strategies. Schroders is one of several asset managers to offer LDI investment strategies that typically use derivatives to help pension funds match their assets with their liabilities. It is a £1.6 trillion market, which has almost quadrupled in the 10 years through 2020, according to the UK’s Investment Association.
• Wealthy Consumers Are Spending on Luxury Goods Like It’s 1999. On Oct. 11, the same day the IMF warned of darker economic clouds on the horizon, the world’s biggest luxury company posted surprisingly strong sales, suggesting that wealthy shoppers’ appetite for high-end goods was nowhere near sated. LVMH Moet Hennessy Louis Vuitton SE managed to beat analyst estimates at four of its five main divisions. The biggest and most profitable one, which includes houses like Christian Dior, where a single dress can command nosebleed prices, led its growth march once again. In a call with analysts, Chief Financial Officer Jean-Jacques Guiony was asked about the “divorce” between global economic fundamentals—sharply rising interest rates, widespread inflation, and looming recession—and the resilience of the luxury industry. “Luxury is not a proxy for the general economy,” Guiony said. “We end up selling to affluent people and they have a behavior on their own, which is not necessarily totally aligned with economics.” In other words, while grocers see their customers become penny-wise when inflation strikes, Louis Vuitton can boost prices without immediately hurting demand.
• Oil Extends Gains as China Debates Quarantine Cuts for Travelers. Brent rose much as 1.6% to trade above $93 a barrel, adding to Wednesday’s gain. China’s bureaucrats are debating whether to reduce the amount of time people coming into the country must spend in mandatory quarantine, according to people familiar with the talks. China’s Covid Zero strategy, which relies on mass testing and lockdowns to stamp out infections, has added to bearish factors weighing on global crude demand this year. The shift in policy would need to be approved by senior leaders, so could still be altered or not deployed at all, said one person.
• A Dirty Fuel Is in High Demand as Europe’s Diesel Crisis Worsens. Diesel may not be glamorous but it is increasingly prized, with refiners in Asia and the Middle East stepping up shipments of the vital industrial fuel to Europe as the region grapples with a shortage. Exports from Asia swelled to near a three-year high in September of 306,000 barrels a day, according to Vortexa Ltd. data. The region’s reliance on Asian and Middle Eastern supplies is likely to continue as inventories remain low with winter approaching, said Serena Huang, lead Asia analyst. Flows of diesel from processors in the Middle East are also expected to surge this month.
• Ukraine’s Grid Thrown Out of Balance After Power-Station Attacks. Power demand exceeded supply for the first time since Russian salvos began targeting electricity infrastructure last week, according to the latest Ukrenergo data published by the International Energy Agency. Officials appealed for Ukrainians to reduce consumption. “The enemy’s constant missile attacks are destroying our energy infrastructure,” Ukrenergo said in a message posted on Telegram. Ukrainians need to be “conscious and frugal,” and electricity may be unavailable on Thursday between 7 a.m. and 10 p.m. local time, it said.
• Germany faces about €200 billion of additional costs for LNG imports by the end of the decade, money that would be better spent on energy efficiency, climate think tank E3G said. Improving the energy use of buildings can save more gas than would be provided by new LNG terminals, it said.
• Goldman cut its three-month forecast for aluminum, copper and iron ore, citing bearish macro headwinds, including dollar strength and uncertainty over China’s demand outlook. Alcoa CEO Roy Harvey asked the US and allies to take urgent action sanctioning Russian aluminum, saying his company supports it.
• The Bloomberg Commodity Index rose as Chinese officials debate easing some Covid rules. Gold traded near a three-week low. Iron ore fell below $90 a ton, deepening the longest rout since 2021. Wheat edged higher as Saudi Arabia sought to buy more than half million tons of the grain.

 

*All sources from Bloomberg unless otherwise specified