October 23, 2023

Daily Market Commentary

Canadian Headlines

  • Brookfield Asset Management Ltd. is exploring raising separate pools of capital to invest in the Middle East, as one of this year’s most active dealmakers seeks to bolster its presence in the region, people familiar with the matter said. The Canadian firm, which currently invests in the region through its global funds, is studying options to raise dedicated money for Gulf deals, the people said, asking not to be identified as the matter is private. It’s seeking capital for both private equity buyouts as well as real estate transactions, according to the people. Brookfield may look at buyouts in sectors including business services, financial infrastructure and health care, while in real estate it’s keen to invest in areas like logistics firms and industrial parks in Saudi Arabia, the people said. Deliberations are in the early stages, and it wasn’t immediately clear how much Brookfield is planning to raise.
  • Teck Resources Ltd. raised the cost of its flagship copper mine in Chile once again as the Canadian miner deals with further construction delays. Teck, which has spent much of this year fighting off a hostile approach from Glencore Plc, said its Quebrada Blanca 2 project would now cost between $8.6 billion and $8.8 billion, compared to an earlier estimate of $8 billion to $8.2 billion. QB2, which Glencore wanted to acquire earlier this year before switching its focus to buying Teck’s coal business, is seen as one of the best copper projects in development, but has been hit by a series of cost blowouts. Teck also cut its production targets for the second straight quarter as the Canadian miner grappled with operational setbacks at both its copper and coal operations.

World Headlines

  • European stocks fell for a sixth session in a row as a glum earnings report from Barclays Plc weighed on the banking sector, while underwhelming regional business activity data and geopolitical concerns also eroded risk appetite. The Stoxx Europe 600 Index was down 0.2% by 9:31 a.m. in London, hovering at its lowest level since Jan. 2. Banks dropped the most, with Barclays slumping as much as 8.7% after missing estimates at its investment bank and lowering guidance for its UK lender for the second consecutive quarter. European stocks are tracking a third straight monthly decline and are on the verge of erasing their 2023 gains amid higher bond yields and worries of a possible escalation in the Israel-Hamas war. The Stoxx 600 is now testing major support as well as oversold technical levels and, while this leaves scope for a short-term bounce, the week remains packed with risk events including business activity indicators and a rate decision from the European Central Bank.
  • Stocks rose ahead of earnings from Microsoft Corp. and Alphabet Inc. Treasuries stabilized, with the US 10-year yield holding near 4.8%, amid growing speculation that the recent selloff was excessive. Bitcoin topped $35,000 and the euro swung to a loss against the dollar as data showed the French and German economies struggling. Treasuries are steadying after some of the market’s most prominent bears warned of an economic slowdown, stoking bets the declines have overshot and that the Federal Reserve will need to lower interest rates. Wild swings in government debt are unsettling investors as a resilient economy makes it hard to work out when the Fed will halt rate hikes. Surging government issuance and geopolitical tensions are also clouding the outlook.
  • Asian stocks reversed earlier losses as Treasury yields dropped and onshore Chinese equities eked out gains. The MSCI Asia Pacific Index climbed as much as 0.4%, on track to end a four-day slide that took the gauge to a 11-month low. Benchmarks in Japan, South Korea and Taiwan finished higher, while Hong Kong’s Hang Seng Index fell to its lowest level since last November as trading resumed after a holiday. India was closed for a holiday. Mainland China stocks steadied after a four-day losing streak that saw a Shanghai benchmark drop below a key level. A sovereign wealth fund’s purchase of exchange-traded funds on Monday was seen providing relief.
  • Oil held near $90 a barrel after Monday saw the biggest drop since Hamas’s attack on Israel, amid signs the conflict will remain contained for the time being. Global benchmark Brent was little changed after tumbling by 2.5% in the previous session. There are growing calls within Israel to rethink the scope of a ground invasion amid the danger of retaliation by Hezbollah militants from Lebanon, fears about the fate of some 200 hostages in Gaza and the risk of Israeli military casualties. The lack of any immediate disruptions in the Middle East, the source of about of a third of the world’s crude, has seen some of the war-risk premium being eroded. Brent is still about 7% higher than before the Oct. 7 attack, however, and the main triggers for a further surge in prices include Washington ramping up compliance checks on sanctioned Iranian oil and Tehran disrupting key shipping routes.
  • Gold fell from near a five-month high amid signs of ebbing demand for safe-haven assets after a long rally sparked by conflict in the Middle East. The metal fell as much as 1%, on track for its biggest loss in three weeks. The slide follows a series of sharp gains as investors sought to hedge against a spillover in the Hamas-Israel conflict which could have implications for global energy markets. Federal Reserve Chairman Jerome Powell will give a speech in Washington on Wednesday, which will be closely watched for indications of the US interest-rate path. Later Tuesday, purchasing managers’ indexes covering services and manufacturing will be released, alongside gauges from the Richmond and Philadelphia Fed.
  • Private-sector activity in the euro area kicked off the final quarter of 2023 with another dismal showing, suggesting the region’s economy may be in recession. S&P Global’s purchasing managers’ index slowed to a three-year low in October, dropping to 46.5 — clearly below the 50 mark that separates expansion and contraction. Economists expected a slight improvement to 47.4. The euro swung to a loss against the dollar, falling as much as 0.1% to $1.0655 and snapping a three-day rising streak. Bonds held onto earlier gains, which sent the 10-year German yield as much as 8 basis points lower to 2.79%. Bund yields are trading around 20 basis points off a peak touched earlier this month.
  • General Motors Co. can no longer say if it will make up to $14 billion in profit this year because a United Auto Workers strike, now in its sixth week, has made the company’s financial future too difficult to predict. The Detroit carmaker pulled the forecast Tuesday while reporting better-than-expected third-quarter results. GM made an adjusted profit of $2.28 a share, beating Wall Street estimates of $1.84, thanks to growth in its North American business and historically high vehicle pricing. Revenue was $44.1 billion, almost $1 billion more than analysts had forecast. The figures show how much pressure the strike has put the industry under, casting a shadow over an otherwise strong year in which the carmaker has gained market share. GM beat third-quarter estimates despite losing $200 million from the walkout during the period.
  • In a year when the US economy exceeded almost everybody’s expectations, the underlying federal deficit roughly doubled, spotlighting a dire fiscal trajectory likely to only worsen the partisan budget battles in Washington. The government ran a $2.02 trillion deficit for the fiscal year through September, after adjustments to remove the impact of President Joe Biden’s student-loan forgiveness program, which was scotched by the Supreme Court. The gap is $1.02 trillion more than the prior year. The surge is a powerful illustration of a fiscal path that’s triggered warnings from economists, politicians and credit rating agencies. It also helps explain why yields on longer-term US Treasuries are reaching highs unseen since before the global financial crisis, with the government needing to issue ever more debt to cover the shortfall of revenues relative to spending. Ten-year yields surpassed 5% on Monday.
  • JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon said the fact that central banks got financial forecasting “100% dead wrong” about 18 months ago should prompt some humility about the outlook for next year. Speaking on a panel at the Future investment Initiative summit in Riyadh, Saudi Arabia, Dimon voiced doubts that central banks and governments around the world could manage the economic fallout from rising inflation and slowing global growth. Dimon likened today’s situation to that of the global economy in the 1970s, with high spending and lots of wastage, and brushed off the impact of further rate hikes
  • General Electric Co. raised its forecast for profit and free cash flow for the year as rebounding demand for air travel drives growth in its increasingly critical aerospace business. The maker of jet engines and power-generation equipment now expects 2023 adjusted earnings of $2.55 to $2.65 a share, up from a prior projection of no more than $2.30. That tops the $2.36 average of analysts’ estimates compiled by Bloomberg. Sales will grow at a low-teens percentage rate while free cash flow will rise to as much a $5.1 billion, both increases from the company’s prior forecast. GE’s aviation operations are experiencing “rapid growth driven by robust demand and solid execution, largely in commercial engines and services,” Chief Executive Officer Larry Culp said Tuesday in a statement that also detailed third-quarter results.
  • Verizon Communications Inc. posted earnings that beat analysts’ estimates for the third quarter, with home internet and business phone customers offsetting the telecommunications giant’s continued decline among mobile consumers. The largest US wireless carrier reported adjusted earnings per share of $1.22 in the third quarter, according to a statement Tuesday. Wall Street expected adjusted earnings of $1.18 a share, according to an average of estimates compiled by Bloomberg. New York-based Verizon also raised its guidance for the year, saying it expects free cash flow of above $18 billion, a $1 billion increase from its previously issued guidance. Operating revenue for the quarter was in line with analysts’ estimates, at $33.3 billion.
  • Coca-Cola Co. raised its full-year outlook, citing strong year-to-date performance despite price increases and other pressures on the consumer’s wallet. With the ongoing willingness of consumers to pay steadily higher prices for beverages, the company said it now expects 2023 full-year organic revenue growth of 10% to 11%, and adjusted profit growth of 7% to 8%. Coca-Cola had earlier said it expected 8% to 9% organic revenue growth for the full year, and adjusted profit growth of 5% to 6% from $2.48 in 2022. A consensus of analysts had expected $2.64 for full-year adjusted earnings and organic revenue growth of about 9.9%. Price mix — or price changes across a range of products and packaging — grew by 9%. Analysts were expecting a price-mix increase of 6.2%. Volume rose 2%, also beating estimates. In North America, where prices increased by 5% during the quarter, volumes were flat. The company said in July that it expected volumes to increase in the second half of the year.
  • The European Union launched a wind power package on Tuesday to counter the growing influence of China and spur its own industry, as the bloc focuses more firmly on China as the biggest threat to its clean-tech industry. The bloc’s panic earlier this year that it was about lose its clean-tech industry to the US, lured by its promise of huge tax credits and lack of red tape, has largely subsided. The EU is growing increasingly confident that few of its companies will abandon its shores in favor of President Joe Biden’s Inflation Reduction Act. To defend the role of the EU’s industrial champions in the climate transition, the bloc now wants to make sure that Europe’s world-leading wind industry — companies like Siemens Energy AG and Vestas Wind Systems A/S — doesn’t suffer the same fate as the solar sector 10 years ago. The vast majority of solar panels are now made in China.
  • The UK economy lost jobs again in the quarter though August, marking the longest drop in employment since the depths of the coronavirus pandemic and a sign that inflationary pressures may be abating. Employment fell 82,000 in June to August after a 133,000 drop in the period from May through July, the Office for National Statistics said Tuesday. It was third consecutive three-month period in which employment has fallen compared to the previous three months, the worst stretch since early 2021. The ONS changed the way it calculates the figures released Tuesday after delaying its unemployment and employment figures “to produce the best possible estimates.”
  • Germany’s economy is projected to dislodge Japan’s as the world’s third largest in 2023, helped by a slide in the yen against the dollar and the euro. The International Monetary Fund’s latest projections estimate Germany’s nominal gross domestic product at $4.43 trillion this year, compared with $4.23 trillion for Japan. That would leave Germany lagging only the United States and China in terms of economic size. The projections come as the yen teeters close to the 160 mark against the euro and remains within striking distance of the 33-year low against the dollar that sparked a second round of currency intervention in October last year. The euro last reached 160 yen in August 2008.
  • China has approved a plan to issue more additional sovereign debt and adjust the 2023 central government budget, state broadcaster CCTV reported, as Beijing looks to boost stimulus. The moves were made during a meeting of the Standing Committee of the National People’s Congress — the Communist Party-controlled parliament that oversees government borrowing — which ended Tuesday. It was not immediately clear how much in additional sovereign debt issuance was approved or what types of projects it may be used for. CCTV also did not report how the budget was adjusted.