October 26, 2022

Daily Market Commentary

Canadian Headlines

  • The Canadian government imposed new conditions on Rogers Communications Inc.’s $14.7 billion takeover of rival Shaw Communications Inc., saying that a divestiture of Shaw’s wireless assets to another firm must guarantee better prices for consumers. Rogers and Shaw have agreed to sell most of Shaw’s wireless division to Quebecor Inc. to resolve a legal challenge from Canada’s Competition Bureau, which is trying to block their merger on the grounds that it will harm competition in the sector. Canadian Industry Minister Francois-Philippe Champagne said Tuesday he would approve the Quebecor part of the agreement on two conditions. The Montreal-based company would have to agree to hold the wireless licenses for at least 10 years, and it would have to lower prices in Ontario and Western Canada — Shaw’s territories — to levels similar to those in Quebec.
  • Air Canada agreed expand a plane order from Airbus SE as the carrier looks to enlarge its fleet amid the post-Covid rebound in air travel. The carrier said it’s adding 15 A220-300 jets by converting options into firm orders, according to a statement that confirmed an earlier report by Bloomberg News. The order follows a deal closed in 2016 for 45 A220s that included 30 options. Air Canada has already received 31 of those planes, according to Airbus orders and deliveries data for September. The market value of the 15 additional planes is about $528 million in 2021, based on prices provided by aircraft appraiser Avitas Inc.The A220 is a Canadian aircraft, designed and launched by Montreal-based Bombardier Inc. before being sold to its European rival.

World Headlines

  • European stocks edged lower, pausing their rally after two days of strong gains, as investors assessed mixed earnings reports and braced for another rate hike from the European Central Bank on Thursday. The Stoxx Europe 600 was 0.2% lower as of 12:09 p.m. in London. Technology shares fell, tracking losses in Nasdaq futures after disappointing updates from Alphabet Inc. and Microsoft Corp. Construction and materials shares outperformed, buoyed by better-than-expected results from Assa Abloy AB and Skanska AB. Market participants are paying close attention to guidance updates in the earnings season to gauge the impact on businesses of surging prices and hawkish central banks. Investors are also awaiting tomorrow’s ECB meeting, at which policy makers are expected to raise rates by 75 basis points in the latest effort to rein in record inflation.
  • US index futures fell as megacap technology shares slumped in pre-market trading, marring a three-day rally on Wall Street and raising new doubts over whether this year’s $5.5 trillion selloff is nearing a bottom. Contracts on the Nasdaq 100 fell more than 1.5% after disappointing quarterly updates from Microsoft Corp., Google parent Alphabet Inc. and Texas Instruments Inc. S&P 500 futures were down about 0.8%. Treasuries extended gains, with the 10-year yield falling to around 4.07%, and a gauge of the dollar declined for a second day to its lowest level in three weeks. Stocks have been buoyed in recent days by mostly solid earnings and speculation the Federal Reserve may curb the pace of rate increases amid evidence its aggressive tightening is starting to weigh on the economy.  About a quarter of S&P 500 companies have reported third-quarter results, with more than two-thirds beating analysts’ estimates despite the big-tech setback. But concern is mounting that slowing output will dent corporate profits in coming months.
  • Asian stocks climbed for a second day, as Chinese authorities sought to boost investor confidence and the dollar fell alongside Treasury yields. The MSCI Asia Pacific Index rose as much as 1.3%, with most markets advancing in the region as local currencies strengthened versus the dollar. Tech stocks were among the top sectoral gainers, bolstered by a slide in benchmark borrowing costs. Stocks in Hong Kong and China rebounded following a rout earlier in the week, as Chinese authorities said late Tuesday that they would ensure a healthy development of financial markets. The gauges pared gains as a lockdown in one of Wuhan city’s central districts reinforced investor concerns about China’s strict Covid Zero policy.
  • Oil pared an earlier drop as sharp decline in the dollar made commodities priced in the currency more attractive. West Texas Intermediate traded near $86 after earlier shedding 1.4%. A gauge of the dollar declined for a second day to its lowest level in three weeks. Strength in the greenback has weighed on crude ever since its retreat below $100 a barrel over the summer. The benchmark has lacked direction lately, torn between the prospects of a slowdown in global growth as central banks hike interest rates to combat inflation and OPEC+ output cuts. Trading volumes have suffered on WTI as a result, coming in at about half of normal levels so far this week.
  • Gold jumped as the dollar and Treasury yields extended declines, with traders looking ahead to next week’s Federal Reserve meeting for clues on whether the end of its aggressive monetary-tightening campaign is near. Bullion has had a volatile 2022 — prices surged in the wake of Russia’s invasion of Ukraine, but have tumbled in recent months under pressure from the Fed’s aggressive monetary tightening policy and a strengthening dollar. Data released Tuesday showed consumer confidence fell in October to a three-month low as widespread inflation weighed on Americans, while home prices have declined the most since 2009 as high borrowing costs sapped demand.
  • The worst Treasury rout in decades has room to run as the Federal Reserve unreservedly makes fighting inflation its top priority, according to JPMorgan Asset Management. While yields in the world’s biggest bond market have skyrocketed this year along with US interest rates, they’ve yet to reach their peak and fully price in the risks of an economic downturn, said Iain Stealey, international chief investment officer for fixed income at the $2.5 trillion fund giant in London. He said 4.5% on 10-year Treasuries was a “good” entry level to buy. “You’d want to be owning Treasuries when there’s sort of more conviction that recession is actually on the cards,” Stealey said in an interview in Singapore. When the Fed finally pauses on hiking rates, “that’s probably when you want to be buying” in a big way.
  • US mortgage rates topped 7% for the first time in more than two decades, extending a string of steep increases that have stymied housing demand. The contract rate on a 30-year fixed mortgage rose 22 basis points to 7.16% in the week ended Oct. 21, marking the 10th-straight increase, according to Mortgage Bankers Association data released Wednesday. With rising mortgage rates, the group’s gauge of applications to purchase or refinance a home dropped for the 10th time in 11 weeks, falling by 1.7% to the lowest level since 1997.
  • Russia signaled it would hold routine annual nuclear exercises, military maneuvers bound to be closely watched as its war against Ukraine drags on into a ninth month. President Joe Biden warned Russia against using a nuclear or radioactive weapon in Ukraine and said he’s been in discussions about the possibility. “Russia would be making an incredibly serious mistake were it to use a tactical nuclear weapon,” he said.  Ukraine said its counteroffensive has slowed as rainy weather makes it harder to move military equipment, the nation’s defense minister said in an interview with Fox News.
  • Chancellor of the Exchequer Jeremy Hunt is seeking to fill fiscal shortfall of £35 billion when he delivers his autumn statement next month, officials familiar with the matter said. The Treasury has drawn up a menu of 104 options to cut spending as they seek to get the public finances back onto a sustainable track, according to the officials, who cited Treasury and Office for Budget Responsibility data from this week. The Treasury didn’t immediately respond to a request for comment.
  • President Xi Jinping has put himself in position to rule China for at least another decade, and possibly for life. The question now is what he’ll do with all that power. On one level, Xi has made it clear where he wants to take China. At the opening of the Communist Party congress last week, he repeated a goal to make China a modern socialist power by 2035, boosting per capita income to middle-income levels and modernizing the armed forces. Then by 2049, the 100th anniversary of the People’s Republic of China, he wants to ensure the nation “leads the world in terms of composite national strength and international influence.” It’s how Xi plans to get there that’s unsettling markets. Chinese assets plummeted earlier this week after the president surrounded himself with allies during the twice-a-decade leadership reshuffle, notably positioning Shanghai party chief Li Qiang as premier despite a lack of central government experience. He also signaled a shift of priorities from economic development toward security, heightening investor anxiety over how an unrestrained Xi will steer the country.
  • Goldman Sachs Group Inc. strategists said conditions for a trough in US equities are not visible yet as the asset class doesn’t fully reflect the latest rise in real yields and odds of a recession. “US equity valuations do not yet offer a historically large premium to the real returns on offer from bonds and cash,” strategists including Kamakshya Trivedi wrote in a note dated Oct. 25. There can be “significant downside if a proper recession occurs or geopolitical risks in Ukraine or elsewhere intensify,” the note said. None of the US assets tracked by Goldman are fully pricing in a recession, with equities factoring in the lowest odds of a “severe hawkish scenario,” the strategists wrote. Their views differ from those of peers at Citigroup Inc. and JPMorgan Chase & Co., who said the stumble in markets implies that a recession is getting priced in.
  • Megacap stocks slide in premarket trading on Wednesday after disappointing quarterly updates from Alphabet Inc. and Microsoft Corp., set to wipe off about $295 billion in market value from the biggest US companies. The Google parent said on Tuesday it would slow hiring and control expenses, signaling that it was girding for tough times ahead as the economy falters, while Microsoft gave a lackluster Azure sales forecast. Both stocks were down approximately 6% in premarket trading. “The main message is that expenses are being cut back,” said Neil Campling, an analyst at Mirabaud Securities. “Tech has got the memo that margin resilience is the focus and the days of speculative dollar spending on new projects are over.”
  • Michelin shares fell after the French tiremaker lowered part of its full-year guidance and postponed a planned investor update by several months as spiraling inflation is making it hard to give any forecasts. The stock slipped as much as 7.2% and was trading 3.5% lower as of 9:15 a.m. in Paris on Wednesday. In the previous four sessions, Michelin shares had jumped 9.6%.  “Hyperinflation” is expected to boost expenditures this year by as much as €2.6 billion ($2.6 billion), Chief Financial Officer Yves Chapot said on a conference call Tuesday. He cited “sharp” increases since August in costs for transport, raw materials, labor and energy. The developments prompted Michelin to postpone its capital markets day initially planned for next month until March or April. The environment remains challenging and it’s “far too early” to answer any question on 2023, Chapot said. The company will release next year’s guidance in mid-February when it publishes full-year results, he added.
  • Meta Platforms Inc. criticized Apple Inc. for changing its App Store terms to take a portion of social-media advertising revenue, saying the iPhone maker was “undercutting others in the digital economy.” The policy change, disclosed this week, requires users and advertisers to make an in-app purchase when they pay to “boost” posts in apps like TikTok and Meta’s Instagram. Apple takes a commission of as much as 30% on in-app purchases, meaning a company like Meta would lose a portion of its ad revenue to the iPhone maker. Shares of Meta fell 3.4% during pre-market trading in New York on Wednesday after closing Tuesday at $137.5. The company’s stock is down 59% for the year to date.
  • Hilton Worldwide Holdings Inc. reported earnings that surpassed analyst estimates, as the travel recovery lifted a key metric past 2019 levels for the first time since the pandemic began. The company reported adjusted earnings per share of $1.31, according to a statement Wednesday. That compared to the average analyst estimate of $1.25 in data compiled by Bloomberg. The lodging industry has enjoyed a strong rebound, as pent-up demand for leisure travel and the gradual recovery in business trips and work conferences has pushed prices and occupancy rates higher. Hilton’s revenue per available room, a key hospitality industry metric, was up 5% from 2019. That was the first time that measure surpassed pre-pandemic levels.
  • New UK Prime Minster Rishi Sunak delayed an economic strategy planned for Monday until Nov. 17 as he sought more time to make the “right decisions” on managing the British economy. The delay from Oct. 31 was announced in a readout of Wednesday’s Cabinet meeting issued by Sunak’s office. Sunak told his new top team of ministers that “it is important to reach the right decisions and there is time for those decisions to be confirmed with Cabinet,” according to the readout. “The Autumn Statement will set out how we will put public finances on a sustainable footing and get debt falling in the medium term and will be accompanied by a full forecast from the Office for Budget Responsibility.”
  • Barclays Plc’s traders beat estimates in the third quarter, offsetting steep declines for its investment bankers as growing economic headwinds keep deals on the sidelines. Trading revenue rose 45% to £2.26 billion ($2.6 billion), ahead of its Wall Street rivals and more than the estimate of £1.76 billion, according to a statement Wednesday. This gain, driven by fixed income, commodities and currencies trading, excludes some hedging losses tied to its mistakenly issued securities earlier this year. Investment banking fees fell 45% to £533 million, missing estimates and broadly in line with declines at other firms.
  • Heineken NV pointed to signs of weakness in consumer demand after beer sales missed estimates amid growing inflationary pressures. The world’s second-largest brewer said beer volumes rose 8.9% on an organic basis in the third quarter, below the 11.8% average analyst estimate. Rising costs dented margins and higher prices discouraged some customers from drinking more. The stock fell as much as 10% in Amsterdam trading, the most since 2003. Brewers have managed to largely protect margins this year by raising prices to cope with soaring costs. But there’s a limit to how much customers may be able to handle that as rampant inflation and higher food and energy costs destroy discretionary purchasing power.

*All sources from Bloomberg unless otherwise specified