October 25, 2022
Daily Market Commentary
Canadian Headlines
- John Tory cruised to a third term as mayor of Toronto, as voters in Canada’s financial capital opted for a status-quo candidate with a strong fiscal pedigree at a time of growing economic uncertainty. It’s the first time any mayor has won three consecutive elections in Toronto since it was merged with five other municipalities to create an enlarged city in 1998. Tory had 62% of the vote with the vast majority of polls counted as of 11:56 p.m. Toronto time, according to the city’s election website. Gil Penalosa, an urban planner and consultant, was second with 18%. Canada’s largest city is facing a number of challenges, including the lingering financial effects of Covid-19 lockdowns, a likely recession and a housing affordability crisis. Among Tory’s main campaign promises was a pledge to fix the housing crisis. Years of rising prices and the recent surge in mortgage rates has kept home ownership out of reach for many residents, and rents are rising. Tory’s plan involves opening up vast tracts of residential land currently dedicated to single-family homes to multiplexes and apartment buildings.
- Canadian pot producer Canopy Growth Corp. isn’t waiting any longer to pull the trigger on acquiring three companies it had planned to buy only when marijuana became federally legal in the US. Chief Executive Officer David Klein said in an interview before an announcement that Canopy will create a new entity, Canopy USA LLC, to purchase the companies — Acreage Holdings Inc., Jetty Extracts and Wana Brands — in which it has options to take control in the event of US legalization. The deal, which is subject to a shareholder vote, will make Canopy profitable and allow it to create a US “house of brands” that can move into new states and use each companies’ intellectual property, even without the federal legal change that the deals were contingent on, he said. “By triggering the total ownership of Acreage and bringing Jetty, Wana and Acreage under one umbrella, we get to more aggressively take control of our destiny in the US and get these businesses performing better than they are today,” Klein said.
World Headlines
- European stocks were broadly steady as traders assessed corporate earnings while bracing for a central-bank decision due later this week. The Stoxx Europe 600 was little changed at 11:30 a.m. in London. Media and retail sectors advanced, while chemicals underperformed with Linde Plc after the company proposed delisting from the Frankfurt Stock Exchange. UBS Group AG rose after reporting better-than-expected profit in the third quarter as higher interest rates helped offset lower client activity. Banking shares underperformed as HSBC Holding Plc fell the most since February after announcing a change of chief financial officer and reporting higher-than-expected loan-loss charges in its third-quarter results.
- US equity futures fell after earlier struggling for direction, as investors awaited major earnings reports and weighed hawkish central bank policies. Contracts on the S&P 500 dropped 0.2% as of 5:30 a.m. in New York, after positive corporate results boosted the underlying index on Monday. Nasdaq 100 futures were down 0.1%, with traders awaiting earnings after market hours from big names including Microsoft Corp., Texas Instruments Inc. and Alphabet Inc. In pre-market trading, US-listed Chinese stocks staged a limited rebound after losing almost $80 billion of market value in a historic selloff that pushed the shares to their lowest level in over nine years. Major internet companies including Alibaba Group Holding Ltd., JD.com Inc. and Pinduoduo Inc. gained at least 2% each.
- Asian stocks climbed, helped by a rebound in Chinese technology shares that followed Monday’s steep losses in the wake of the Communist Party congress. The MSCI Asia Pacific Index rose as much as 0.9% before paring the advance to 0.3%, boosted by gains in internet giants Alibaba and JD.com. A gauge of Chinese tech stocks erased an early loss of almost 3% to jump by a similar magnitude, as Alibaba Health and JD Health climbed. Tech and materials shares in the broader region fell. Benchmarks in Hong Kong and on the mainland whipsawed in volatile trading, closing marginally lower. Sentiment remains fragile after the dramatic selloff Monday following Xi Jinping’s move to secure his grip on power and amid ongoing concern over the nation’s Covid-zero policy.
- Oil fell as traders continue to weigh the prospects for commodities demand as global growth slows against near-term supply tightness in the crude market. West Texas Intermediate slid below $84 a barrel. Since late September prices have been bouncing in a range of about $17 as traders weigh interest rate hikes that menace economic expansion against planned output cuts from the Organization of Petroleum Exporting Countries and its allies. In recent days oil volatility has slumped as prices have struggled for direction. For the global Brent benchmark a gauge of implied volatility fell to its lowest level since the middle of August.
- Gold held steady as traders assessed whether the Federal Reserve will indicate next week if its hawkish interest-rate policy will continue for the rest of the year. Bullion has been whipsawed in the past few months, tumbling almost 20% from a March peak as the US central bank aggressively tightened monetary policy. The metal surged the most in over two weeks on Friday as Japanese authorities’ intervention to prop up the yen drove down the greenback, before it weakened again on Monday as the rout in Chinese stocks boosted the strength of the US dollar. The non-yielding metal, which is priced in the US currency, tends to have a negative correlation with the dollar.
- Iron ore tumbled to the lowest since November on pessimism over the demand outlook in China, where weaker home prices and rising steel inventories signal slow consumption in the biggest buyer of the raw material. The steel-making ingredient capped its longest stretch of weekly losses since 2016 on Friday. China’s fragile property market and Covid restrictions continue to weigh on prices. In the latest signs pointing to weaker demand, home prices sank for a 13th month in China, while steel inventories are expanding again. Major steel mills surveyed by the China Iron & Steel Association showed stockpiles were up 8.6% in mid-October compared with early in the month, and were more than 50% higher than at the start of the year.
- UBS Group AG posted a robust quarter on the back of surging rates and cost control, enabling the Swiss bank to confirm a plan to return around $5.5 billion to investors this year. UBS said net income in the three months to September was $1.73 billion, compared with analyst estimates of $1.57 billion. The wealth management unit saw lending revenue jump amid client inflows of $17.1 billion, while investment-banking revenue slumped. The response to inflation by central banks in the US and Europe are giving banks a tailwind in lending revenue, helping to maintain ambitious dividend and buyback plans even as the economic outlook darkens. Global banks are nevertheless seeing equities and deal-making revenue hurt by the energy crisis, Russia’s war in Ukraine and the slowdown in China’s economy.
- Adidas AG is ending its partnership with Ye following a rash of offensive behavior from the rapper and designer that turned a once-thriving shoe brand into a lightning rod for criticism. The German sports company said it is cutting ties with Ye, formerly Kanye West, with immediate effect and will take a €250 million ($246.5 million) hit to net income in the current fiscal year, confirming an earlier story by Bloomberg News. “Ye’s recent comments and actions have been unacceptable, hateful and dangerous, and they violate the company’s values of diversity and inclusion, mutual respect and fairness,” the company said in a statement. Adidas will terminate the partnership with Ye, end production of Yeezy branded products and stop all payments to Ye and his companies, it said.
- Profits and losses aren’t usually thought of as a consideration for central banks, but rapidly mounting red ink at the Federal Reserve and many peers risks becoming more than just an accounting oddity. The bond market is enduring its worst selloff in a generation, triggered by high inflation and the aggressive interest-rate hikes that central banks are implementing. Falling bond prices, in turn, mean paper losses on the massive holdings that the Fed and others accumulated during their rescue efforts in recent years. Rate hikes also involve central banks paying out more interest on the reserves that commercial banks park with them. That’s tipped the Fed into operating losses, creating a hole that may ultimately require the Treasury Department to fill via debt sales. The UK Treasury is already preparing to make up a loss at the Bank of England.
- General Motors Co. beat Wall Street’s consensus third-quarter profit estimate on record revenue and affirmed its guidance for the year, an indicator that rising interest rates have not yet hit its business. GM reported adjusted profit of $2.25 a share on Tuesday, surpassing analysts’ projection for $1.89 a share. It also maintained guidance for full-year profit of $6.50 to $7.50 a share. The Detroit automaker posted revenue of $41.9 billion thanks to a 24% jump in US vehicles sales for the three months ending Sept. 30. Analysts expected GM to bring in $42 billion in revenue for the quarter. Electric-vehicle market leader Tesla Inc. last week said its revenue came in at $21.5 billion. Traditional rival Ford Motor Co. reports its earnings on Wednesday. The automaker’s results beat profits of $1.53 a share a year ago and $1.14 per share in the second quarter, easing concerns about vehicle affordability and a possible recession.
- One of China’s largest non-state conglomerates told analysts that it’s targeting to sell as much as $11 billion of assets within the next 12 months, amid efforts to bolster both its balance sheet and investor confidence. Fosun International Ltd.’s management said during a Monday briefing it plans to dispose of 50 billion to 80 billion yuan of non-core assets as it works to focus on its consumer-discretionary business, Citigroup Inc. analysts including George Choi wrote in a report. The conglomerate considers its core assets to be its listed pharmaceutical, retail and tourism arms as well as insurer Fidelidade, according to the investment bank. Shanghai-based Fosun, whose business spans from the Club Med resort chain to French fashion house Lanvin, has been under investor scrutiny regarding its liquidity since Moody’s Investors Service wrote in June about the company’s funding pressures. The credit rater put Fosun on watch for further downgrade Sept. 30, citing “elevated refinancing risk.”
- Bilt Rewards, which operates a loyalty program and credit card that converts rent payments into points, said its valuation more than quadrupled to $1.5 billion. Left Lane Capital led the $150 million equity funding round, which featured Wells Fargo & Co, Greystar, Invitation Homes Inc., Camber Creek, Fifth Wall, Smash Capital, Prosus and Kairos, Bilt Chief Executive Officer Ankur Jain said in an interview. The New York-based startup, which launched last year, processes $3 billion in annualized rent payments, and its Bilt Mastercard customers are spending at an annualized rate of $1.6 billion, Jain said. Bilt is profitable and has more than 500,000 active members, a figure Jain said he expects to grow dramatically as the company’s landlord partners direct tenants to Bilt as a primary payment platform.
- The investments needed to reach the goal of net-zero emissions by 2050 is $100 trillion, according to research from BNY Mellon Investment Management and Fathom Consulting. The amount is less than what groups including the International Renewable Energy Agency and the International Energy Agency are estimating. The IEA expects the figure to be closer to $125 trillion. To put the number in perspective, $100 trillion would equal about 15% of total global investment over the next 30 years — or about 3% of global gross domestic product in the same period.
- 3M Co. cut its outlook for the second time this year as a strong US dollar weighed on results. The industrial giant said Tuesday that it now sees full-year sales falling 3% to 3.5%, down from a prior forecast of a 0.5% to 2.5% decline. Profit for the year excluding some items is now expected to be in the range of $10.10 to $10.35 a share, down from a prior forecast of $10.30 to $10.80. Earnings excluding some items were $2.69 a share in the third quarter, better than the average of $2.60 projected by analysts. Revenue was 8.6 billion, missing the $8.72 billion average estimate.
- General Electric Co. cut its full-year profit target despite strong cash performance in the past quarter, as higher costs in the struggling wind operations add to ongoing challenges with supply chain and labor. Adjusted earnings per share will be $2.40 to $2.80, GE said Tuesday in a statement, after previously guiding to the low end of a range of $2.80 to $3.50. Analysts had estimated $2.67 on average. The guidance adjustment underscores the depth of the challenges facing the renewable energy business as Chief Executive Officer Larry Culp pushes to turn around the once-mighty manufacturer.
- A number of European Union nations are pushing for a price cap on natural gas used to generate power, but the bloc’s executive arm is warning that any such step would need to avoid boosting demand or subsidizing electricity to foreign consumers. The European Commission issued the caution ahead of a key ministerial meeting on Tuesday, according to a person familiar with the matter. The bloc’s executive arm is advising EU members that such a price limit would have to be extended to power-importing countries like the UK or Switzerland for it be effective, the person added. Alternatively, the EU would have to export electricity at a higher price than in domestic trades, a move prohibited in a number of international agreements with partners, said the person, who asked not to be identified as talks on the issue are private. The commission circulated its view in the form of a document summarizing the costs and benefits of such a price cap.
- United Parcel Service Inc. said it was on track to achieve its full-year financial targets, as the courier tries to manage through a slump in peak-season demand that has rattled the shipping market. The Atlanta-based company will achieve its full-year revenue of around $102 billion and an adjusted operating margin of about 13.7% by “executing our strategy and controlling what we can control,” it said in a statement Tuesday. The results may offer a measure of relief to investors after repeated warnings of weak volumes and economic challenges in recent weeks from rival FedEx Corp. and companies across the freight market. UPS Chief Executive Officer Carol Tomé has pursued a “better, not bigger” strategy that has bolstered profit margins and helped it navigate demand volatility.
- Big Oil’s run of record profit will suffer only a minor dent for the third quarter, even as the global economy shows signs of cracking under the pressure of rising inflation and interest rates. Indications of the slowdown will be evident across their sprawling businesses, from lower crude prices to slumping chemicals margins. Yet the five oil supermajors are still poised to report the second-highest earnings since their formation in the early 2000s, according to data compiled by Bloomberg. A modest decline in earnings after record profits earlier this year won’t be enough to take the industry out of the political cross-hairs. As governments around the world grapple with both the cost of energy today and the need to transition to cleaner alternatives in the future, the risk of state intervention remains.
- Florida Governor Ron DeSantis declined to say whether he’ll run for president as Democratic challenger Charlie Crist accused him of being too distracted by a bid for the White House in 2024. In Florida’s first and only re-election debate, Crist, 66, a member of Congress and former governor of the state, said DeSantis had taken “his eye off the ball” on issues like rising housing and insurance costs amid rising speculation of a presidential run in the 2024 Republican primaries. Instead, Crist asserted, DeSantis is focusing on divisive policies intended to engender national support from Republicans, like abortion restrictions, clamping down on how gender and race are taught in schools and immigration.
*All sources from Bloomberg unless otherwise specified