The Daily – October 21, 2022

October 21, 2022

Daily Market Commentary

Canadian Headlines

• Just 41% of US travelers said in a June 2022 sentiment survey that they had a trip to Canada planned in the following nine months. Granted this was before Canada announced an end to all entry requirements as of Oct. 1, but confidence in vacationing north of the border has taken a hit. Consider that before the Covid-19 pandemic, two-thirds of Canada’s total overnight visitors were from the US. The US was Canada’s primary tourist market in 2019, with 15 million Americans visiting that year. At the close of 2021, the figure was at a dramatic low of 45,000. Tourism revenue had reached C$105 billion ($76 billion) in 2019, and continued to lag at C$63 billion in 2021. The good news is that Canada’s tourism revenue could reach just 0.8% below 2019 levels by the end of 2023, according to the World Travel & Tourism Council.

World Headlines

• European equities dropped, trimming this week’s advance, as bond yields climbed while investors fretted about central banks’ hawkish policies and monitored the political turmoil in the UK. The Stoxx Europe 600 fell 1.5% by 10:06 a.m. in London as US Treasury yields held at the highest level since 2007. In the UK, the FTSE 250 retreated 1.4% as investors monitored the race for who will replace Liz Truss as prime minister and as the UK Treasury may be forced to delay its long-awaited Oct. 31 fiscal plan because of the resignation. Retail and consumer products sectors led the declines. Sentiment took a hit after Gucci owner Kering AG fell as it posted slower sales growth than luxury rivals. Adidas AG also slumped after cutting its full-year forecast and L’Oreal SA declined after posting a sales update.
• Stocks dropped as Treasury yields continued to climb, with traders betting the Federal Reserve will keep raising interest rates until inflation is defeated, and as investors assessed companies’ resilience to a multitude of headwinds in the latest earnings reports. Wall Street stock futures were lower. Twitter Inc. slid as much as 16% in premarket after news that Biden administration officials are discussing whether the US should subject some of Elon Musk’s ventures to national security reviews, including the deal for the social media company. The dollar rose amid the elevated Treasury yields. The 10-year US note’s yield climbed to the highest since 2007 as traders priced in a higher peak Fed policy rate. The yen weakened further beyond the closely watched 150 per dollar level, boosting speculation that more intervention will be needed to support the Japanese currency.
• Asian stocks fell, set to cap a second week of declines, as recession worries weighed on sentiment amid hawkish central-bank remarks and stringent China Covid restrictions. The MSCI Asia Pacific Index dropped as much as 1.2% Friday, with most of the markets in the region marking losses. The Hong Kong benchmark hit its lowest since April 2009, while gauges in Singapore and the Philippines declined more than 1%. China’s pandemic rules continued to weigh on regional investor sentiment amid additional lockdowns. Risk sentiment was also hurt by higher Treasury yields after a Federal Reserve official said he expects interest rates to be “well above” 4% this year.
• Oil retreated on Friday after a volatile week as concerns over a global economic slowdown continue to hang over the market. Benchmark Brent futures traded near $91 a barrel amid risk-off sentiment across markets as bond yields surge. Investors are juggling slowdown fears against signs of oil market tightness, while fluctuating risk sentiment in broader markets has regularly whipsawed crude prices. Oil has a lost a third of its value since early June due to slowdown concerns and aggressive monetary policy from central banks to tame inflation, However, the market is facing a period of supply uncertainty in coming months as OPEC+ cuts output and the European Union implements sanctions on Russian flows.
• Spot gold headed for a second weekly decline as the dollar remained strong and outflows continued from bullion-backed exchange-traded funds. The Bloomberg Dollar Spot Index has been supported by hawkish comments from Federal Reserve officials. The yield on the 10-year Treasury climbed above 4.28% for the first time since 2007 as traders start to price in a higher peak Fed policy rate. Non-interesting bearing gold is nearing its lowest mark since 2020. Outflows from gold-backed ETFs are accelerating, a bearish signal for bullion. Holdings in the funds shrank by 12.5 tons on Wednesday, the biggest one-day decline since March 2021 and extending a plunge that’s endured for almost six months.
• Copper fell, heading for a weekly decline, as global inflation and economic slowdown concerns outweighed tightness in supplies that has raised warnings from the market. Global recession fears are mounting as central banks hike interest rates to fight surging inflation. Hawkish remarks from Federal Reserve officials are expected to continue supporting a strong dollar, making commodities more expensive to other currency holders. Copper has dropped by about a third from a March record, despite brisk demand and shrinking inventories that are nearing historical lows.
• First came Snap Inc.’s disappointing results. Then news that US officials were discussing whether they should subject some of Elon Musk’s ventures to national security reviews, including the deal for Twitter Inc. Anxious investors are selling out of social media stocks, putting them on track to lose more than $47 billion in market value as they tumble in premarket trading. Shares of Snap Inc. plunged as much as 29%, after it reported its slowest quarterly sales growth ever, saying a decline in advertising spending continues to drag on results. The selloff spread to peers including Meta Platforms Inc., Alphabet Inc., Pinterest Inc. and Trade Desk Inc. amid concerns that an economic slowdown is deepening and could hurt companies that rely on digital advertising for revenue. Snap’s quarterly results were the first from big internet companies that depend on advertising, setting the stage for what investors can expect when larger players like Alphabet and Meta Platforms report next week.
• Goldman Sachs Group Inc. strategists joined a growing chorus warning that credit markets need to do more to price in recession risks. Risks are “largely skewed to the wider side” for Goldman’s spread forecasts in 2023, credit strategists including Lotfi Karoui wrote in a report Oct. 20. This means that credit, which fell into a bear market in 2022, may be headed for further pain. The New York-based bank added its voice to calls from PGIM and JPMorgan Asset Management flagging the upward risks to yield premiums in credit as the chances of recession in the US mount. Current spreads indicate that investors are still “complacent,” JPMorgan Asset’s Kelsey Berro said in an interview on Bloomberg Television this week.
• Verizon Communications Inc. missed quarterly subscriber estimates as the largest US wireless carrier struggles to keep pace with rivals that have made gains by offering deep discounts and improved mobile service. The company added only 8,000 monthly wireless phone subscribers in the third quarter, according to a statement Friday, well below analysts’ predictions for 38,500 new phone customers. Adjusted earnings for the period were $1.32 a share, ahead of the average analyst estimate of $1.28. Revenue of $34.2 billion topped estimates of $33.8 billion.
• Natural gas in Europe declined after leaders came together to back urgent measures, including a price cap, to contain the energy crisis that’s engulfed the economy. Benchmark futures fell as much as 10% on Friday, heading for a third straight weekly loss. The politicians asked the European Commission to propose a “temporary dynamic price corridor,” and said they would pursue a framework to cap the price of gas in electricity generation. They also want to take steps to avoid extreme price spikes and use the EU’s joint purchasing power in negotiations with sellers. The European Union presented the united front after German Chancellor Olaf Scholz yielded to pressure from other member states for a gas price cap. He had earlier warned that limiting prices could endanger supply at a time when the region needs all it can get. But countries including France, Italy and Poland had been pushing hard for a cap as dwindling Russian supplies bring the threat of shortages and blackouts.
• Credit Suisse Group AG will aim to settle a tax fraud and money laundering case in France on Monday that saw coordinated raids in five countries from Australia to the UK. The Swiss lender is in the final stretch of negotiations with prosecutors at the Parquet National Financier to reach a settlement that would include a fine but no admission of guilt, according to people familiar with the matter. If a full agreement is reached, the Swiss bank will appear Monday morning in a Paris court to seek approval, the people said who asked not to be identified because the matter is private. The size of the settlement is unknown and the deal could still fall apart ahead of the court hearing.
• Adidas AG’s next chief executive officer is set to inherit an even tougher job. The company warned Thursday that unsold goods are piling up as consumer demand weakens across China and western markets. That sent the German sport apparel maker’s stock slumping as much as 10%. Problems are accumulating under outgoing Chief Executive Officer Kasper Rorsted, including a publicity crisis over an alliance with rapper and designer Kanye West. Whoever replaces Rorsted as CEO next year will need to come up with buzzy products as the future of the bestselling Yeezy line is in doubt. Adidas shares have now lost all the gains they made during Rorsted’s six-year tenure, leaving the German company with a market value about a sixth of that of US rival Nike Inc.
• European Union governments have pledged more than 550 billion euros ($536 billion) to protect citizens and businesses from soaring energy costs over the past year, highlighting the enormous fiscal burden the bloc’s leaders face as they jostle over how to pay for it. That figure climbs to 710 billion euros when support for utilities via loans, bailouts and nationalizations are taken into account, according to the think tank Bruegel. That’s just 90 billion euros shy of the EU’s landmark borrowing program to help the region recover from the two-year Covid pandemic. The figures will add to concerns of a financial arms race as countries rush to protect their own citizens from soaring energy costs, exposing fiscal inequalities within the 27-member bloc. Germany makes up the bulk of support committed, according to Bruegel, with its 200 billion-euro package, of which just less than half has already been allocated.
• Vietnam reported a patient with H5 bird flu in the northern province of Phu Tho, the country’s first such human case since Feb. 2014, according to a statement on the health ministry’s website. The ministry ordered the local health department to tighten measures on bird flu prevention, according to the statement. The 5-year-old patient, who was confirmed to have the flu on Oct. 17, is in serious condition with respiratory, liver and kidney failure, Cong An Nhan Dan newspaper reported on its website. Those who have been in contact with the child have tested negative for the disease, according to the report.
• The convulsions that set the cryptocurrency market tumbling earlier this year and delivered shock waves through the industry have subsided. Now comes the shakeup in the C-suite. More than two dozen high-ranking executives — from Alex Mashinsky, the charismatic and controversial co-founder of now-bankrupt crypto lender Celsius Network to Brett Harrison of digital-asset exchange FTX US and Jesse Powell, the outspoken head of FTX’s rival Kraken — have vacated their posts in the past two months alone. While an assortment of idiosyncratic reasons has been given for the exodus, it’s clear the turbulence that shook the market starting in the spring has taken a toll. It would be hard for it not to, after $2 trillion worth of crypto evaporated in the rout. Yet market observers also see another common thread: The combination of a larger presence of institutional investors, heightened regulatory scrutiny and tighter purse strings at venture-capital firms is causing a reassessment of the type of management needed for the next phase of crypto. The recent calm that has settled over the market may itself herald a transition, some say, as traditional finance takes a bigger stake.
• American Express Co. slumped after it set aside more for bad loans than analysts expected, suggesting rising interest rates could start crimping customers’ ability to pay their bills. Provisions for souring loans were $778 million in the quarter, worse than the $573 million analysts in a Bloomberg survey were expecting. AmEx has warned investors for months that charge-offs would rise as consumers begin borrowing more in the wake of the pandemic. The net write-off rate jumped to 1.1% from 0.8% a year ago. For now, AmEx and its rivals are benefiting from historically high prices. That’s because the firm takes a slice of the purchase price each time a consumer uses one of its cards at checkout. But investors are concerned that the Federal Reserve’s efforts to raise interest rates and tamp down inflation may spark a recession and lead to higher card losses.
• The UK Treasury may be forced to delay its long-awaited Oct. 31 fiscal plan because of the resignation of Prime Minister Liz Truss, adding a layer of political risk to an event that had become crucial for markets and the Bank of England. Chancellor of the Exchequer Jeremy Hunt is still working toward delivering the statement on Oct. 31, but the final decision on scheduling the statement will be a matter for Truss’s successor, two people familiar with the matter said, speaking on condition of anonymity. It also relies on Hunt remaining as chancellor under a new leader. The possibility of a delay may unsettle investors who dumped the pound and government bonds in the days following Truss’s ill-fated economic plan in September. Hunt’s program was meant to reassure markets and feed into the Bank of England’s thinking on interest rates.
• President Joe Biden has begun aggressively promoting his student debt relief plan with less than three weeks before midterm elections, after all but avoiding the subject on the campaign trail while the government worked out kinks in the program. Biden will promote the initiative Friday at Delaware State University, following a White House event Monday to officially launch the application website. About 12 million people have applied for loan forgiveness as of October 18, according to the president, who said more than 40 million stand to benefit. But multiple legal challenges, including a lawsuit from Republican-led states, are moving through courts, threatening to halt the effort and throw millions of applicants into limbo. Biden’s late blitz to sign up borrowers also has some Democrats worried the president waited too long to make an impact in the election.
• Munich Re said it will probably take a hit of about 1.6 billion euros ($1.6 billion) after hurricane Ian led to massive damages in Florida, and warned reaching its full-year profit goal has become “significantly more challenging.” The estimate of losses from the storm is “subject to substantial uncertainty,” the company said in a statement Friday. Shares of the reinsurer rose after saying it expects to post a higher-than-expected profit of about 500 million euros for the third quarter, helped by a one-off effect at its Ergo life unit. Ian hit Florida in September and was one of the strongest hurricanes to ever make landfall in the US. It carved a trail of ruin across southern Florida, downing bridges, inundating roads and shattering homes. Insured losses have been estimated at more than $60 billion.
• Equity funds are still seeing inflows despite deeply pessimistic sentiment, with “final capitulation” not yet here, according to strategists at Bank of America Corp. Global stock funds had inflows of $9.2 billion in the week through Oct. 19, according to a note from the bank citing EPFR Global data. Cash funds saw additions of $14.5 billion, while $12.2 billion left bonds. Gold had redemptions of $1.5 billion, the data show. The report comes after Bank of America’s fund manager survey earlier this week showed investors had thrown in the towel on equities and global growth. But with inflation remaining persistently high and risks of a recession growing, stock markets have more room to fall, strategist Michael Hartnett wrote in the flows note, dated Oct. 20.
• Xi Jinping has already rewritten China’s rules of political succession. The end of the Communist Party’s congress will show how far he intends to go. The twice-a-decade gathering is expected to culminate around noon Saturday with the announcement of a new Central Committee, about 200 of the nation’s most powerful ministers, executives and generals. Xi’s presence on the list will provide the first official confirmation that the 69-year-old leader intends to ignore the party’s unofficial retirement age of 68. It also basically guarantees his return for a third term when top leadership posts are unveiled, likely Sunday. The changes to the Central Committee will reveal much about Xi’s intentions as he opens the door to indefinite rule. Will he keep aging allies like legislative chief Li Zhanshu, 72, indicating a broader rejection of the retirement norms? Will younger officials like Premier Li Keqiang, 67, and top political adviser Wang Yang, 67, exit early, suggesting a willingness to enforce rules for those other than the “core” leader?

 

*All sources from Bloomberg unless otherwise specified