The Daily – October 24, 2022

October 24, 2022

Daily Market Commentary

Canadian Headlines

• The Canadian dollar weakened against the US dollar together with all of its G-10 peers as investors remain focused on interests rates in the US and Europe, as well as upcoming earnings reports of megacap technology companies. The Bank of Canada may raise rates by as much as 75 basis points this Wednesday. Ahead Monday, Statistics Canada releases a flash estimate of manufacturing activity.

World Headlines

• European stocks extended gains from the prior week on Monday as investors braced for the first busy week of earnings and monitored updates from the UK leadership race. The Stoxx Europe 600 index added 0.6% by 9:57 a.m. in London, paring earlier advance as private-sector activity in the euro zone contracted for a fourth month in October. Media, travel and leisure and utilities rose, while energy underperformed as oil declined amid souring sentiment over China following the conclusion of the party congress. The UK FTSE 250 mid-cap index was steady and the FTSE 100 was 0.4% lower as Rishi Sunak took a huge step toward becoming the UK’s next prime minister as former premier Boris Johnson pulled out of the contest. Former Chancellor of the Exchequer Sunak would be viewed as a steady pair of hands following the market turbulence seen under Liz Truss‘s short term.
• US futures struggled for direction as a rout in Chinese shares weighed on sentiment while investors await the next batch of earnings from some of the world’s biggest companies. Treasury yields dipped and the dollar gained. Contracts on the S&P 500 and Nasdaq 100 fluctuated before edging higher. US-listed Chinese stocks including Alibaba Group Holding Ltd. to JD.com Inc. tumbled in premarket trading, with investors spooked by President Xi Jinping’s tightening grip on China’s ruling party. While the outlook for interest rates in the US and Europe remains at the center of investors’ attention, their focus this week will also be on earnings of megacap technology companies, among the key profit-growth engines for the S&P 500. The five biggest tech firms by revenue — Apple Inc., Microsoft Corp., Alphabet Inc., Amazon.com Inc. and Meta Platforms Inc. — are projected to report the steepest contraction in earnings in three years, data compiled by Bloomberg show.
• Asian equities slid, dragged by Chinese shares as President Xi Jinping’s move to tighten his leadership deepened investor worries, offsetting advances in Australia, South Korea and Japan. The MSCI Asia Pacific Index erased an earlier gain to drop as much as 1.2%, with Internet giants Tencent and Alibaba the biggest drags. A selloff in Chinese stocks deepened in afternoon trading, with the Hang Seng China Enterprises Index falling more than 7% to the lowest since 2008. A gauge of Hong Kong-listed Chinese technology shares tumbled almost 10%. Investors remained jittery as a leadership reshuffle highlighted Xi’s unquestioned grip over the ruling party, with allies set to take up key economic posts. An early loosening of Covid restrictions seemed less likely, while a set of long-delayed economic data showed a mixed recovery, further damping market sentiment.
• Oil declined as sentiment soured over China following the conclusion of the party congress, filtering through broader markets. West Texas Intermediate slipped toward $83 a barrel on Monday as investors also digested a raft of delayed Chinese economic data that showed a mixed recovery during the third quarter. A stronger dollar added to headwinds, making commodities priced in the currency less attractive, while European economic figures pointed to contraction, boosting the likelihood of recession in the region. Crude has lost a third of its value since June as fears over a global economic slowdown continue to hang over the market. However, significant OPEC+ output cuts and looming European Union sanctions on Russian oil flows have raised concerns about the supply outlook heading into winter. For now though, traders remained glued to the outlook for economic growth and further central bank rate hikes.
• Gold edged lower as the rout in Chinese stocks helped boost the strength of the US dollar, which typically has a negative correlation with the precious metal. Bullion has tumbled more than 20% since a March peak, with investors seeking fresh hints on its next direction. There’s increasing concern that aggressive monetary tightening by central banks, including the US Federal Reserve, could trigger a recession, which is acting as a brake on gold. However, reports emerged on Friday that policy makers were eyeing smaller moves for December.
• Tesla Inc. cut the price of its cars in China by about 5% as it ramps up production at its Shanghai factory, partly reversing price hikes imposed earlier this year. The US-based electric vehicle pioneer lowered the price of its locally-built basic Model 3 to 265,900 yuan ($36,774) from 279,900 yuan effective Monday, its website shows. The starting price of a Model Y SUV was cut to 288,900 yuan from 316,900 yuan. The cuts come as Tesla faces hotter competition from local EV makers such as BYD Co., which sold a record 200,973 vehicles last month, and upstarts like Nio Inc. and Xpeng Inc., which are expanding their line-ups. Domestic automakers accounted for almost 80% of EV sales through the first seven months of the year, according to data compiled by the China Passenger Car Association.
• Once the key profit-growth engines for the S&P 500 Index, megacap technology companies enter this earnings season with diminished stature, a prospect that should frighten investors hoping for an end to this year’s equities bear market. The five biggest firms by revenue among this cohort — Apple Inc., Microsoft Corp., Alphabet Inc., Amazon.com Inc. and Meta Platforms Inc. — are mired in a profit slump, with earnings per share projected to fall 22% from the same quarter of 2021, the steepest contraction in at least three years, data compiled by Bloomberg show. After losing roughly $3 trillion in market value combined this year amid slowing economic growth and surging interest rates, the group’s weighting is around the lowest in more than two years. But it still accounts for about a fifth of the benchmark — more than the utilities, energy and consumer sectors combined.
• One of Wall Street’s most vocal bears is doubling down on his short-term bullish call on equities a week after his initial view was met with skepticism by clients. Morgan Stanley’s Michael Wilson sees stocks grinding higher as markets transition to expectations of falling inflation and lower interest rates, he said in a note Monday. After his call last week was “met with doubt from clients,” Wilson said a pullback in bond yields should provide fuel for the next leg of the tactical rally, “until we get full capitulation on 2023 earnings estimates, something we think may take a few more months.” The strategist, who correctly predicted this year’s slump, sees the S&P 500 Index bouncing as much as 15% if it breaches its 200-week moving average of 3,605 points, about 4% below Friday’s close. A similar view is held by Stifel Nicolaus & Co. strategists, who said in a separate note they see the benchmark rallying to 4,300 points in the next 6 months as inflation cools and recession is pushed back to the third quarter of next year.
• Royal Philips NV will reduce its workforce by 4,000 jobs as the Dutch company aims to reduce operating expenses while wrestling with a costly recall of its sleep-apnea treatment devices. The severance and termination-related costs are expected to be approximately €300 million ($295 million) in the coming quarters, Philips said Monday. The restructuring comes as Roy Jakobs replaced Frans van Houten as chief executive officer this month, who had held the position for 12 years. Philips’s priority is “to improve execution so that we can start rebuilding the trust of patients, consumers and customers,” Jakobs said in a statement. These steps include strengthening patient safety and quality management as well as “urgently improving our supply chain operations.”
• Shell Plc is investing about $1.5 billion in Qatar’s latest gas development, months after buying into another of the Gulf nation’s massive expansion projects. The company will take a 9.375% stake in North Field South, which will expand Qatar’s liquefied natural gas output capacity by 16 million tons a year, Energy Minister Saad Al-Kaabi said at a signing ceremony in Doha on Sunday. He spoke alongside Shell’s chief executive officer, Ben van Beurden. TotalEnergies SE joined the project in September, with a holding the same size as Shell’s. Qatar is selling 25% of North Field South, leaving at least one more equity partner to be announced.
• Japan likely conducted its biggest ever currency intervention to prop up the yen late Friday, based on Bank of Japan balance of payment figures and an estimate of flows by money broker Central Tanshi Co. The size of the suspected market action is estimated to be as much as 5.5 trillion yen ($36.8 billion), according to a basic calculation using the BOJ’s forecast for the change in its current account and the Central Tanshi projection for the balance assuming no intervention. The estimate offers a ball park figure for the amount Japan likely spent to support the embattled currency. The Central Tanshi projection of the balance factors in flows such as transactions on bonds and treasury bills. Other market participants made similar projections.
• A consortium led by Japan Industrial Partners Inc. is considering a takeover of Toshiba Corp. at a valuation of about 2.4 trillion yen ($16.1 billion) in what could be Asia’s biggest buyout this year, according to people familiar with the matter. The JIP-led group, which is the preferred bidder to take the Japanese industrial group private, plans to provide 1 trillion yen in cash, while seeking financing totaling 1.4 trillion yen from banks along with a committed line of credit of 200 billion yen in working capital, said the people, who asked not to be identified as the matter is private. Toshiba, in its regular meeting with banks including Sumitomo Mitsui Banking Corp. on Oct. 20, informed them that JIP is valuating the company at around 2.4 trillion yen and asked them to give financing support, the people said.
• Penny Mordaunt is facing calls from supporters and members of her own campaign team to pull out of the UK leadership race as Rishi Sunak piles up support in his efforts to become the next prime minister. Mordaunt is locked in talks with Members of Parliament from the ruling Conservative Party to obtain the 100 nominations she needs to go forward to the final ballot before a 2 p.m. deadline. She told her closest allies she’s serious about standing and can reach the threshold, people familiar with the discussions said, asking not to be named. On Monday morning, a spokesperson for Mordaunt’s campaign said she had more than 90 backers. Some MPs on her team have told her she should pull out, arguing that Sunak’s clear majority among Tory MPs means it would be impossible for her to form a stable government. Sunak took a huge step toward victory after he picked up backing from some MPs who were behind Prime Minister Boris Johnson until he abruptly pulled out of the contest last night.
• America’s closest allies are nervously watching US midterm elections for any signals that voters could return Donald Trump to the White House in two years, with foreign officials fanning out to battleground states for meetings to collect information that might help avoid a 2016-like shock. Officials from Europe and Asia are flying from their home countries to augment the traditional work of consulates and embassies in trying to decipher the political contests, according to conversations with diplomats and others from foreign governments. Germany, for example, dispatched a senior diplomat to Georgia, a swing state that backed President Joe Biden by a narrow margin in 2020. The trip featured meetings with the local chamber of commerce, local politicians of both parties, and activists including Reverend James Woodall — all occasions for taking the pulse of the state’s tight US Senate race and its high-profile contest for governor.
• A sense of exasperation swept across Chinese markets as President Xi Jinping moved to stack his leadership ranks with loyalists, with stocks capping their worst day in Hong Kong since the 2008 global financial crisis and the yuan weakening to a 14-year low. The Hang Seng China Enterprises Index, a gauge of Chinese stocks listed in Hong Kong, plunged 7.3% in its worst showing after any Communist Party congress since the inception of the index in 1994. Foreign investors fled mainland markets, selling a record amount of equities via trading links in Hong Kong and fueling a nearly 3% loss in the CSI 300 Index. The onshore yuan fell as much as 0.6% to the weakest since January 2008.
• Credit Suisse Group AG agreed to pay €238 million ($234 million) to settle a French criminal probe into allegations the bank helped clients stash undeclared funds. The deal brings to an end the investigation into suspicions of laundering of tax fraud proceeds, top financial prosecutor Jean-Francois Bohnert said in court Monday. Under the terms of the agreement, the Swiss bank makes no admission of guilt. “It is an important moment for Switzerland’s banking history” and the relation of the country with the French tax authorities, Judge Stephane Noel said during the Paris hearing, after detailing the amounts and approving the resolution of the criminal allegations.
• Last week, Apple Inc. showed off its new iPads, including the first redesign of its entry-level tablet in five years. Promoted with an array of expensive accessories, the pitch has left many reviewers confused. If people need an attachable keyboard, a protective back panel with an adjustable kickstand and a stylus pen (which needs its own charging cable and separate adapter) to get the most of their iPads, is it really still a tablet? Or just a laptop you buy in pieces? At major tech events this fall, device makers struggled to define what exactly the purpose of a tablet is. Initially heralded as a revolutionary mobile device and potential PC killer, the tablet hasn’t really proved to be either. My colleague Mark Gurman went into greater detail about the flaws with the newest set of iPads on Sunday in his newsletter Power On. To be sure, tablets are still selling — nearly 80 million units were shipped in the first half of this year, according to research firm IDC — but the tablet’s present and future appears to be as a superfluous peripheral or a mediocre version of the very thing it was supposed to replace: laptops.

*All sources from Bloomberg unless otherwise specified